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Why Shares of Applied Materials, Inc. Plunged 10% Today

By Travis Hoium - May 18, 2018 at 2:35PM

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Earnings beat expectations, but there were some weak points in guidance.

What happened 

Shares of semiconductor and display equipment manufacturer Applied Materials, Inc. (AMAT -5.18%) fell as much as 10.1% in trading Friday after reporting fiscal second-quarter 2018 earnings and guidance that left investors unimpressed. Shares didn't recover much throughout the day and were down 9% at 12:20 p.m. EDT. 

So what

Quarterly revenue was up 29% to $4.57 billion and net income jumped 37% to $1.13 billion, or $1.09 per share. On a non-GAAP basis, which pulls out on-time items, earnings were $1.22 per share. Interestingly, revenue easily surpassed the $4.45 billion analysts were expecting and non-GAAP earnings per share topped expectations of $1.13.

A stack of broken smartphones.

Image source: Getty Images.

What investors focused on today was weak guidance for smartphone products like chips and displays. Management said semiconductor sales are only expected to grow 7% in the fiscal third quarter, half of what Wall Street expected, and investors are concerned that weakness in display sales will curb growth. But keep in mind that display was just 13% of sales in the quarter. 

Now what

As if the stock dropping after an earnings beat wasn't bad enough, management's guidance for the fiscal third quarter of $4.33 billion to $4.53 billion in revenue and $1.13 to $1.21 per share in earnings were at the high-end of expectations. Analysts were expecting $4.45 billion in revenue and $1.14 per share in earnings next quarter. 

There may be lumpiness in some of Applied Materials's segments, but I don't see any reason for concern long term. The stock only trades for 11 times fiscal year 2018 estimates and both revenue and earnings are still on the rise as overall consumption of tech products grows. Long term, growth in tech devices is a wave investors will want to ride, even if this quarter seemed a bit disappointing. 

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