Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
Key Morningstar Metrics for Applied Materials
What We Thought of Applied Materials’ Earnings
Applied Materials’ AMAT April-quarter revenue rose 7% year over year to USD $7.1 billion, down 1% sequentially. Non-GAAP gross margin rose 170 basis points year over year to 49.2%. July-quarter guidance calls for 1.0% sequential revenue growth to USD $7.2 billion, and 90 basis points of gross margin compression.
Why it matters: Applied’s results and guidance met our expectations. We continue to see a positive demand environment for chip equipment, led by advanced chip demand for artificial intelligence. We expect this leading-edge demand to more than offset softer short-term demand.
China revenue declined sharply in the quarter, in line with our expectations and the result of a combination of recently enacted US trade restrictions and a pause in orders after supernormal levels last year. Immense orders from Taiwan Semiconductor Manufacturing TSM for cutting-edge chip capacity more than offset the decline.Applied didn’t see any significant demand deterioration from tariff uncertainty, nor a significant direct impact on costs from current tariffs, which we view positively. Still, if the current 90-day pause on many US tariffs ends, permanently higher costs would likely spur a greater headwind.
The bottom line: We maintain our USD $193 per share fair value estimate for wide-moat Applied, with our long-term thesis for growth from cutting-edge chip supply expansion and our expectation for share gains intact. Shares fell 5% following the results in after-hours trading, and look undervalued to us.
We think shares sold off on guidance that merely met expectations and failed to impress investors concerned about medium-term demand. We remain optimistic about a resolution to tariff uncertainty, and we expect Applied to continue capitalizing on strong demand going forward.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
