Applied Materials Impresses
The wide-moat company provided improved guidance for next quarter, but shares are overpriced.
Applied Materials (AMAT) once again reported impressive quarterly results, while providing better-than-expected guidance for next quarter, as the firm benefited from broad-based strength. In line with its peers, Applied’s silicon systems sales were bolstered by foundry demand related to the ongoing 10-nanometer process ramp and memory equipment purchases. Unlike major competitor Lam Research, Applied also sells equipment to display manufacturers, and we expect that the firm will benefit from increasing investments in OLED screens. We are raising our fair value estimate to $31 from $29 per share, as we incorporate superior expectations for fiscal 2017. However, we view 2017 as a likely near-term peak in equipment spending, and recommend prospective investors seek a wider margin of safety before investing in this wide-moat equipment leader.
Fiscal second-quarter sales rose 8% sequentially, to $3.546 billion, as strong equipment and service revenue were modestly offset by a decline in display revenue. While NAND flash sales expectedly grew by 48% over the prior quarter as manufacturers build out 3D NAND capacity, we were surprised to see DRAM revenue improve so significantly at 33% sequentially. We note DRAM pricing has been strong in recent months, and we surmise major suppliers such as Samsung, SK Hynix, and Micron are increasing equipment spending to take advantage. In the past, aggressive DRAM capacity expansion has led to periods of oversupply, so we doubt that DRAM spending will remain elevated for an extended period. Meanwhile, sales to Taiwan and Korea rose 2% sequentially, with these regions accounting for over half of total sales due to 10-nm spending by TSMC and Samsung. Gross margins rose 100 basis points quarter over quarter to 45.1%, as the firm benefited from a mix shift away from lower-margin display revenue. With display spending expected to rebound in subsequent quarters, we project margins to decrease modestly going forward.
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Abhinav Davuluri does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.