Key Morningstar Metrics for Applied Materials
- Fair Value Estimate: USD $193.00
- Morningstar Rating: ★★★
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: High
What We Thought of Applied Materials’ Earnings
Applied Materials’ AMAT April-quarter revenue rose 7% year over year to USD $7.1 billion, down 1% sequentially. Non-GAAP gross margin rose 170 basis points year over year to 49.2%. July-quarter guidance calls for 1.0% sequential revenue growth to USD $7.2 billion, and 90 basis points of gross margin compression.
Why it matters: Applied’s results and guidance met our expectations. We continue to see a positive demand environment for chip equipment, led by advanced chip demand for artificial intelligence. We expect this leading-edge demand to more than offset softer short-term demand.
- China revenue declined sharply in the quarter, in line with our expectations and the result of a combination of recently enacted US trade restrictions and a pause in orders after supernormal levels last year. Immense orders from Taiwan Semiconductor Manufacturing TSM for cutting-edge chip capacity more than offset the decline.
- Applied didn’t see any significant demand deterioration from tariff uncertainty, nor a significant direct impact on costs from current tariffs, which we view positively. Still, if the current 90-day pause on many US tariffs ends, permanently higher costs would likely spur a greater headwind.
The bottom line: We maintain our USD $193 per share fair value estimate for wide-moat Applied, with our long-term thesis for growth from cutting-edge chip supply expansion and our expectation for share gains intact. Shares fell 5% following the results in after-hours trading, and look undervalued to us.
- We think shares sold off on guidance that merely met expectations and failed to impress investors concerned about medium-term demand. We remain optimistic about a resolution to tariff uncertainty, and we expect Applied to continue capitalizing on strong demand going forward.
