Applied Materials shares moved firmly lower in early Friday trading as analysts weighed in on the chip-equipment maker's stronger-than-expected fiscal-fourth-quarter earnings report and what they saw as a muted outlook for non-AI-chip demand heading into next year.
Applied Materials (AMAT) is a key player in the AI investment story, as it provides the equipment to produce the chips that power everything from flat-panel TVs to personal computers and smartphones.
Hyperscalers such as Google (GOOGL) , Microsoft (MSFT) , Amazon (AMZN) and Meta Platforms (META) are poised to spend hundreds of billions building and training their large-language models. Analysts see part of the investments from these cloud-service providers trickling down to the sectors in which Applied Materials has the strongest hold.
But that demand is seen as potentially soft next year as companies allocate spending to AI projects and forecast new investments in areas such as memory and ICaps. These are chips for the internet-of-things, as well as communications, automotive, power and sensors applications.
Applied Materials sees current-quarter earnings in the region of $7.15 billion, with a margin for error of $400 million. The forecast fell modestly short of Wall Street forecasts and clouded the group's stronger-than-expected Q4 report.
Concern about China sales at AMAT
So did concern that export restrictions on high-end technology to China from a new Trump administration would weigh on sales in the region, which not long ago accounted for around 45% of overall revenue.
China sales were pegged at around 30% of revenue over the three months ended in October, a level the group sees maintaining over the final months of calendar 2024.
Chief Executive Gary Dickerson remained focused, however, on the group's ability to develop so-called inflections, which are key changes to chipmaking processes that improve power and efficiency and boost profit margins.
That could be why the group's profit outlook for the quarter, around $2.29 a share, topped Wall Street forecasts.
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"There's a lot of really great inflections that provide a tailwind for Applied," he added during a conference call with investors late Thursday. "And we're bringing enabling technology to our customers in a number of different markets. So, one thing that is also a tailwind for us is pricing improvement as we're shipping more valuable products."
KeyBanc Capital Markets analyst Steve Barger, who carries a sector weight rating on the stock, estimated that sales from a central portion of Applied Materials' so-called Gate All Around transistor could double from the $2.5 billion recorded in the previous fiscal year. The GAA architecture also improves power and efficiency.
Trillion-dollar chip market by 2030: AMAT's CFO
Applied Materials' outlook for wafer front-end equipment sales, or WFE, machinery that forms the basis of chipmaking, was also a concern for analysts.
"We're talking about a $1 trillion semiconductor industry by 2030," finance chief Brice Hill said. "I think that's consistent across most of the industry having that view. And we certainly have that view given the added wafer starts and added capacity across the industry basically every single year.'
"So, it's hard to guarantee '25, but I'll just call out that our Q4 was growth year over year," he added.
Needham analyst N. Quinn Bolton, who lowered his price target on the stock by $15, to $225 per share following last night's earnings update, sees that as weighing on the stock.
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"Over the longer term, management sees that WFE intensity, propped up by the strong China demand of 18% in 2023, could decline and normalize to around 15%, essentially backing away from their long-standing view that WFE should perform in-line, or outperform, semis," said Bolton.
Other price target changes include those of Vivek Arya from Bank of America, who lowered his $10 to $220 a share, and Joe Quatrochi from Wells Fargo, who took his $15 lower to $220.
Applied Materials shares were marked 8.2% lower in premarket trading to indicate an opening bell price of $172.11.
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