AMAT and the Jinhua Jinx!

Applied Materials reported a just “in line” quarter but guidance was well below street expectation. AMAT reported EPS of $0.97 and revenues of $4.01B versus street of $0.97 and $4B. Guidance missed the mark by a wide margin with revs of $3.56 to $3.86 and EPS of $0.75 to $0.83 versus already reduced street expectations of $3.94B and $0.92 in EPS. Applied’s sock was down almost 10% in after market trading.

We had predicted in our preview note yesterday that we thought Applied would disappoint versus reduced expectations and they certainly did.

Jinhua Jinx
We suggested that the Jinhua loss which was downplayed by KLAC and LRCX was going to be worse at AMAT due to their extra China exposure and we were proven correct as AMAT management laid most of the blame for weak Q/Q guidance on Jinhua by saying that revenue would have been flat to up without the Jinhua issue.

Share Slump
We also suggested in our preview that we were concerned about share loss and Applied said on the call that share loss was the second reason for the worse than expected guidance.

Gary Dickerson, CEO of Applied said that current conditions “Do not play to Applied’s strengths” which is code for share loss. Management suggested that EUV roll out was part of the share loss issue, something we have been talking about for a long time as multi-patterning use will be reduced and fabs will be spending more on litho related tools.

“Can you Canoe?”
Management also said that the we will see more of a “shallow and gradual recovery” as compared to previous expectations of a quicker come back. This suggests more of a “U” or “canoe” shaped cycle bottom than previously expected.

It seems very clear that 2019 will be weaker than the 2018 WFE peak.

We had suggested in our preview that AMAT would buyback fewer shares which would not help offset reduced EPS as it did at Lam which bought back a slug of stock to pump up EPS. In the quarter AMAT bought back about $750M in stock so the EPS weakness was more apparent. AMAT may be keeping some of its powder dry and may amp up its buy backs if the share price drops further.

Service Saves & Display is OK
Service was very strong and up 18% while systems were down by 5%. Display at $700M was not bad and in line with plan. Applied said that going forward systems could be down 21% but service up 7%.

Applied harder hit
The main issue we pointed to in our preview note was that we thought AMAT would get hit harder than its peers in the group and this report seems to underscore that view and prove our thesis correct.

Lam is also exposed to similar share weakness but perhaps not as much China exposure. ASML with its EUV roll out and long lead times is perhaps the most immune to the current weakness. KLAC is also more resistant to the near term issues as it supports the EUV roll out but it does have a high China exposure at 25% of business.

The Stocks
We expect AMAT to get hit for the disappointment and its enough of a miss and weaker guide to take the rest of the group down in sympathy along with it. We have been saying that while we are getting closer to a bottom, we are not there yet so its still not safe to go back in the water and buy the stocks.

The overhang from China remains far from resolved and AMATs report makes us painfully aware of that. There is not likely to be a near term recovery in memory and the weakness could continue for a lot of 2019. Right now there is zero visibility as to the timing of a recovery and AMAT underscored that with its shallower and more gradual comment. We continue to stay on the safety of the sidelines avoid the group and more specifically Applied.