AMAT- Trailing Edge & China Almost Offset Floundering Foundry & Missing Memory

-AMAT reported inline resulted helped by trailing edge & China
-Memory remains at very low levels- Foundry remains uninspiring
-China seems to be buying anything they are allowed to buy
-The recovery is too far out & unknown to handicap

Quarter was OK and Guidance also OK

Revenue was $6.63B and EPS of $1.86 versus reduced expectations of $6.38B and $1.84….so more or less “in line”. Given that guidance is usually conservative this could be viewed as a “Miss” especially of true expectations or whisper numbers.

Guidance is for $6.15B+-$400M and EPS of $1.74+-0.18 versus the street at $6.02B and $1.65 in EPS, not very inspiring.

Systems revenue is expected to be down 5% at $4.5B and services up 1%.

Memory is still dead and logic/foundry not much better

Memory makers continue to see the worst downturn in well over a decade and have slowed their equipment purchases to near zero levels as you don’t add capacity when you are already swimming in it.

We have noted that street pricing of memory, especially NAND remains very weak at unsustainable/unprofitable levels.

There does not appear to be any change anywhere on the horizon.

We currently expect memory weakness through the end of the year.

As capex spend is a bit of a trailing indicator we also don’t expect a significant increase in memory spend for the balance of the year,

Advanced nodes and foundry logic while not as dead as memory are not a whole lot better off as spending is at low levels due to weak end market demand. Though there are certainly bright spots like AI, its not enough to offset the more macro weakness.

Trailing edge & old stuff is in vogue again

It seems very weird that the strongest demand remains in older technology nodes and especially in China.

Obviously China is embargoed from the leading edge so they can only buy trailing edge and they are doing so with extreme vigor…anything that isn’t nailed down.

The joke making the rounds in the industry that the Kanban phrase of “just in time” has been replaced in China by “just in case” (just in case they are totally cut off by the US).

While AMAT management seemed to deny the view that China may be stockpiling equipment we are not so sure as there does not appear to be enough fab projects for all the equipment being ordered from all the equipment makers… it just doesn’t add up.

Management did agree that the Chinese government was supporting purchases which they wouldn’t need to do if the tools were truly needed to meet demand in real fab projects.

We remain concerned that the main lifeline that Applied has is China and trailing edge equipment. We are not sure how dependable that demand is or will remain in the future.

When you can’t sell new tools you sell service and AGS is doing well

Obviously the company is at a point where it could live on service alone (though not very well) Management made a point on the call that the dividend could be supported by service alone….probably not as reassuring as they hoped that statement would be

China seems to be buying any chip equipment not nailed down

One of our other concerns that we continue to see is that China has been on a huge spending spree for non leading edge equipment. Its hard to figure out where all the equipment is going as it seems there aren’t that many fabs in China (that we know of).

It has all the makings of the famous toilet paper shortage as people bought in expectation of a shortage.

China seems to be buying any and all equipment they can as they likely fear that they will be cut off from even non leading edge tools. We saw this in ASML’s report this morning where 45-50% of DUV sales were into China.

This demand from China feels artificial and runs the additional risk of slowing because of increased sanctions or just running out of the stampede/herd mentality.

This obviously adds to the risk of a longer/deeper downturn

Dividends & buybacks support the stock because current business doesn’t

On the bright side the company has $10B of buybacks and boosted the dividend as a bit of a consolation prize to offset the business weakness.

Its not a bad consolation prize and the company doesn’t have a lot to do with the excess cash other than pay dividends and buy back stocks.

We wonder how they will justify any claims to CHIPS Act funding in light of having enough cash to boost buybacks and dividends to record levels…seems counter intuitive.

The stocks

We have little to no motivation to own the stock as there is no light at the end of the tunnel yet nor even a hope of a light.

The equipment stocks have been on a bit of a run for no real reason while business continues to suck. Macro news is not encouraging either.

There is no true hope of a recovery without memory and memory seems dead for quite some time.

Maybe investors have no where else to go with their money other than tech because sooner or later the cycle will end …… our concern is that the operative word is later and investors haven’t gotten their hopes up too soon and too high.

About Semiconductor Advisors LLC
Semiconductor Advisors is an RIA (a Registered Investment Advisor),
specializing in technology companies with particular emphasis on semiconductor and semiconductor equipment companies. We have been covering the space longer and been involved with more transactions than any other financial professional in the space. We provide research, consulting and advisory services on strategic and financial matters to both industry participants as well as investors. We offer expert, intelligent, balanced research and advice. Our opinions are very direct and honest and offer an unbiased view as compared to other sources.

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