Applied Materials Earnings: Disappointing Guidance Doesn’t Dent Our Long-Term Conviction

Key Morningstar Metrics for Applied Materials

• Fair Value Estimate: $196.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Applied Materials’ Earnings

Applied Materials’ AMAT fiscal third-quarter results met management guidance, but management expects a decline next quarter. Revenue of $7.3 billion rose 8% year over year and 3% sequentially. Guidance calls for revenue of $6.7 billion at the midpoint, implying an 8.0% sequential decline.

Why it matters: Guidance was disappointing and missed our model. It was also significantly weaker than commentary from peers like KLA and Lam Research. To us, this reflects lumpy order patterns, and we expect artificial intelligence investment to continue driving good chip equipment growth over the medium term.

• Management attributes most of the sequential decline next quarter to normalizing China orders after a strong period of overordering across 2023 and 2024. We expected this, but it appears sharper for the next quarter than we anticipated, and not fully offset by strong logic demand.
• We’re optimistic that AI investment will drive good chip equipment orders for leading-edge logic and DRAM equipment from Applied over the medium term. Weaker short-term guidance doesn’t change our view of Applied’s position to capitalize on this investment in the longer term.

The bottom line: We raise our fair value estimate for wide-moat Applied to $196 per share from $193, with a higher medium-term leading-edge logic forecast, in line with peers. We see the fourth quarter as a speed bump in a positive longer-term story. Shares look attractive after selling off as much as 14% after hours, which we see as an overreaction.

• To us, the quarter portends a timing issue for Applied’s orders, rather than weaker demand or share loss. Positive guidance from peers indicates industry demand remains healthy.
• Applied trades at a significant discount to its peers, which presents a buying opportunity for long-term investors. Looking past a hiccup of a fourth quarter, we see continued investment in leading-edge chip equipment driving good results over the medium term.