We're Trimming Our Price Target for This Semi-Cap Holding
We continue to like the multi-year outlook, but here’s what we’re thinking.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
Shares of Applied Materials AMAT, despite delivering top and bottom-line beats for its October quarter, are under pressure Friday primarily due to its wider-than-expected revenue guidance for the current quarter.
For the January quarter, Applied sees its top line coming in between $6.75 billion-$7.55 billion compared to the $7.05 billion posted in the reported October quarter. The $7.15 billion midpoint of that revenue guidance is a tad short of the $7.25 billion consensus, and that outweighs the midpoint of management’s January quarter EPS guidance of $2.29, which is a wee bit higher than the $2.27 market consensus.
In the past, we’ve seen modest guidance shortfalls punish AMAT's shares, and we are seeing that again.
We’re Focusing on the Longer-Term Outlook
Over the last few years, Applied has grown its revenue, bottom line, and dividend as it has taken share in the semi-cap equipment market even when industry spending softened in 2023. Applied is poised to continue that, but even though Taiwan Semiconductor TSM and others are boosting capital spending levels to address tightening chip capacity, reduced spending from Intel INTC and export restrictions on China mean slower growth for the semi-cap industry next year. While slower, the industry is still expected to grow mid-single digits or higher.
Part of that swing factor will hinge on awards from the U.S. CHIPs Act as well as those from its eurozone counterpart. Earlier this week, we discussed how ~$36 billion in CHIPs Act funding has been earmarked but is yet to be released with disbursements tied to construction milestones. Today, the Biden administration awarded TSM $6.6 billion in direct funding, which supports TSM’s announced $65 billion buildout of three fabs in Phoenix, Arizona. Following reports the Biden administration intends to award the $39 billion in earmarked funds before the end of Biden’s term, we’re likely to hear more announcements like this one.
We are also starting to see funds flow from the European Chips Act, which aims to bolster the EU’s chip production market share to 20% from its current 10%. Funds from that program are starting be awarded as well, including to TSM for a fab in Germany.
That stimulus spending along with incremental capacity additions at existing facilities due to rising demand from AI, data center, smartphone, and other connected devices fuels market expectations for semi-cap equipment spending to hit $400 billion between 2025-2027, according to industry group Semi. That suggests a nice step up compared to the $99.3 billion expected to be spent this year.
Lowering Our AMAT Target
We will trim our AMAT price target to $210 from $220, which still leaves ample upside potential. The move behind that adjustment is a more moderate assumption between stimulus dollars being awarded and converting into shipping product. With that in mind, we will let the stock settle out from the market’s reaction and then make our next move at which time we may adjust our panic point as well.
During the October quarter, Applied bought back roughly $1.4 billion in shares leaving its current program authorization at $8.9 billion. With AMAT trading below levels in the August-October period, when Applied reports its January quarter results, we would not be surprised to learn it was putting that program to work.
At the time of publication, TheStreet Pro Portfolio was long AMAT.
