AMAT Underwhelms- China & GM & ICAP Headwinds- AI is only Driver- Slow Recovery

• AMAT reports good but underwhelming quarter
• China slowing creates revenue & GM headwinds- ICAPs weak
• AI remains the one and only bright spot in both foundry & memory
• Cyclical recovery remains slow – Single digit Y/Y growth

OK quarter – still slow growing, revs up only 5% Y/Y

AMAT came in at revenues of $6.78B , up 5% Y/Y with EPS of $2.12. Guidance is for $6.93B+- $400M and EPS in a range of $2.00 to $2.36. Guidance was only slightly better than current estimates.

Given the standard “beat” versus true expected “whisper” numbers we would view the results as somewhat underwhelming and the after hours trading reflected that.

The recovery from the down cycle remains both slow and elusive

With revenues up only 5% year over year we are certainly not experiencing a “V” shaped recovery or a quick bounce back from the long downturn.

We have suggested many times that the recovery would be slow and arduous and the numbers we see underscore that view. As compared to previous downcycles that bounced back very quickly there are more headwinds and fewer tailwinds to drive the recovery.

AI is the “one trick pony” of the semiconductor recovery

The one and only bright spot of a luke warm recovery is clearly AI. Both in leading edge foundry (read that as TSMC as they are the sole makers of NVIDIA chips) and HBM memory which is the only bright spot in the overall lackluster memory market.

Although we are super bullish on all things AI, it will be difficult for semiconductor equipment makers to have a full scale cyclical recovery without other sectors improving as well.

NAND is still in the dumps and DRAM is really primarily HBM. In foundry logic its really just the leading edge and again primarily TSMC given Intel’s recent cut of capex spend

Running on two cylinders of TSMC & HBM , although strong, is not great for acceleration.

China slows significantly which also creates headwinds for gross margins

China is slowing from the mid 40’s percent to the mid thirties percent of business. This obviously creates a revenue challenge but more importantly creates a gross margin challenge as China customers have been paying significantly higher pricing (we pointed this out in our previous note about Chinese “sucker” customers).

This roughly 10% hit to equipment revenues and higher hit on gross margins adds to recovery headwinds.

Is ICAPs and trailing edge permanently slower?

Management also talked about some weakness in the ICAPs, trailing edge business and projections of mid single digit growth rates (not lighting things on fire)

Our view is that the industry went through a number of years of hyper growth in trailing edge equipment sales driven in large part by new and expanding trailing edge fabs in China and Asia to serve this significant market and now we are in an overcapacity situation such that there is clearly not enough need to buy new trailing edge tools.

The days of “unusual” hyper growth in trailing edge are over and will likely return to more modest numbers over the long run.

This trailing edge of the market has been especially good to Applied and without it being strong will be another significant headwind for the companies recovery.

The Stocks

Management demurred from making any projections about 2025 likely with good reason as things may not be quite as strong as some analysts were thinking/hoping.

Although Applied management used the word “strong” many times there were no numbers or projections to back that up so estimates of future growth may be getting toned down a bit.

As we saw with Lam when they reported last month we experienced numbers that were good but not “good enough” and the stock traded off.

Applied was up $10 during the day but gave back $5 in the aftermarket on what we viewed as a less than stellar quarter, guide and lack of long term projections.

In summary, AI is a great but only a singular driver while NAND, China, gross margins, ICAPs, the rest of DRAM, Intel capex all have headwinds.

We would consider taking some money off the table after the recent recovery in the semi sector from a negative overreaction that caused an overall market correction that we have more or less recovered from.

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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.

Also Read:

LRCX Good but not good enough results, AMAT Epic failure and Slow Steady Recovery

The China Syndrome- The Meltdown Starts- Trump Trounces Taiwan- Chips Clipped

SEMICON West- Jubilant huge crowds- HBM & AI everywhere – CHIPS Act & IMEC

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