Applied Materials Revises Outlook Amid Latest Export Restrictions; Lowering FVE to $110

On Oct. 12, Applied Materials revised its outlook for its fiscal fourth quarter that included revenue of $6.4 billion, plus or minus $250 million, versus $6.65 billion, plus or minus $400 million. The revised sales outlook incorporates the impact of the latest export restrictions partially offset by supply chain improvements. Specifically, the firm expects the new restrictions will reduce its fourth-quarter revenue by about $400 million, plus or minus $150 million. The latest export restrictions target advanced semiconductors and wafer fab equipment that could be used to advance China’s military technology. While Applied is pursuing export licenses, management expects a similar impact to its fiscal 2023 first-quarter results (which ends in January 2023). After taking into account these new export restrictions and a weaker outlook for 2023 equipment spending, we are reducing our fair value estimate to $110 per share from $142 per share for wide-moat Applied Materials. While shares are undervalued relative to our revised fair value estimate, we think market conditions will remain volatile for several quarters as the firm navigates uncertainty related to export restrictions and weaker equipment spending in 2023.