Hopes of a 2020 recovery but nothing solid yet

An in line quarter

Applied reported a quarter just above the mid point of guidance and analyst numbers (which mimic guidance) with revenues of $3.56B and EPS of $0.74 with guidance of $3.685B+-$150M and EPS o $0.72 to $0.80, also in line with current expectations. All in all a fairly boring quarter with business bouncing along a soft bottom cycle.

Memory still in decline

Management pointed out the same thing we have heard from others as well as memory companies and that is that memory companies continue to reduce capacity and shipments.  This means that existing tools are being taken off line, and sit idle in the fab, in order to reduce the excess supply in the market.  All this idled capacity is going to be a long buffer on any upturn which will delay purchases of new equipment until all the idled capacity comes back on line first.  We think all this idled capacity, which continues to pile up, to be a significant impediment to new equipment purchases when memory does indeed recover.

Logic/Foundry is better

As we have also hear and reported from Semicon West, the foundry industry has kicked up spend most notably TSMC. The biggest driver there is the roll out of 5G.  However, its clear that the strength of logic alone is not enough to either offset memory weakness or spark a logic driven up cycle.

Display is weaker

Display business has been weaker and is expected to move down a bit more.  We don’t expect a near term recovery in display given the weakening overall consumer market

Execution and returns remain good

Overall financial performance remains very disciplined and we see good shareholder value return in buy backs.  Gross margin remains better than expected and experienced in previous down cycles.

 The stock

The lack of some inspiring new news and no clear bottom nor clear indication of a recovery (other than pure hope) suggests that there is no real reason to run out and buy the stock.

The story was more or less in line with what we heard from Lam and KLAC so its not like Applied is out performing in any significant way.

In line performance is certainly better than a downward revision to the numbers but management is still not ready to call a “bottom” to the downcycle which suggests that they are not confident either that things will get better any time soon.

The China trade issue just adds to the overall weakness and adds more potential downside versus upside.

The stock is certainly not cheap….with EPS down by almost 50% from roughly a year ago, the stock is not down anywhere near that amount and thus remains at a high valuation for the bottom of the cycle.