Applied Materials Gets Thumped Brian Graney (TMF Panic)
August 18, 1999
Semiconductor manufacturing equipment lead steer Applied Materials (Nasdaq: AMAT) turned in fiscal third quarter EPS of $0.61 late yesterday, up from last year's Asian flu scarred $0.19 and whomping on the Zacks mean estimate of $0.55. In fact, the earnings surge was higher than practically anyone had expected, with the 28 analysts surveyed by Zacks giving an EPS range of $0.33 to $0.55 for the quarter. Meanwhile, revenues rose 28% sequentially to $1.43 billion, also topping forecasts. So, Applied Materials' stock is trading up today, right?
Well, not quite.
Instead of focusing on the earnings performance, the market latched onto the company's order flow during the period. New orders (or bookings) rose 5% from the previous quarter to $1.46 billion, missing expectations in the $1.5 billion to $1.55 billion range. Bookings had risen at an average rate of 33% sequentially over the past three quarters as the Asian markets recovered and the capital equipment sector shifted into upswing mode. Those rates were unsustainable and had to come down, but most observers were hoping for a softer landing instead of Q3's sudden thud. Applied Materials' book-to-bill ratio was also lower than expectations, falling to 1.02.
Adding to the disappointment, management told analysts on a conference call yesterday that it sees bookings undergoing "a plateau effect" that could last for the next one or two quarters. Chipmakers are busy installing and tweaking the new equipment that had driven order growth in the past few quarters, the company said. So while sequential order growth is still being factored in for Q4, it may not amount to all that much.
Since bookings growth is regarded as a key barometer for the general health of the industry, some are viewing Applied Materials' bummer of a forecast as a signal that the chip equipment recovery will proceed with fits and starts instead of going totally parabolic. That explains why a bunch of other process players on the front-end, such as KLA-Tencor (Nasdaq: KLAC), Lam Research (Nasdaq: LRCX), and Novellus Systems (Nasdaq: NVLS), are also down today.
While some of today's pull-back may be justified given that Applied Materials' share price has doubled in the past year, investors may want to take a step back from this new development before turning too bearish on the company's prospects. The chip equipment recovery appears to be catching its breath after a rapid expansion over the past months. If anything, the outlook for chip equipment demand looks quite bright.
As chairman and CEO James C. Morgan pointed out in the Q2 earnings release and again on the firm's conference call, changes are underway at the fabrication plants of chipmakers the world over that should support Applied Materials' business for some time to come. Device geometries are moving to 0.18 microns and will continue to decrease to 0.15 and 0.13 microns in the years ahead. Meanwhile, new conducting materials such as copper and low-k dielectric films are also being introduced and chipmakers are making the move toward 300 mm wafers, which will require upgrades of the wafer fabrication equipment made by Applied Materials.
With all of the change afoot, it's no wonder that Morgan sees the chip equipment market doubling in size to $32 billion by 2003. With the longer-term outlook still bright, investors should be on the lookout for those moments when the short-term infatuated Mr. Market offers opportunities to take advantage of the growth to come.