The supply chain problems in the semiconductor industry are showing no signs of abating as Applied Materials (AMAT +1.36%) -- a company that's expected to reduce the chip shortage with its semiconductor manufacturing equipment -- is finding it difficult to secure enough parts and components to make the equipment it sells to chip-building foundries.
This was the reason Applied Materials' fiscal 2022 second-quarter results (for the three months that ended on May 1) failed to satisfy Wall Street's expectations. The semiconductor manufacturing equipment supplier's guidance was also not up to the mark. Let's look at Applied Materials' fiscal Q2 numbers (released May 19) and see whether the stock can recover its mojo following its 30% decline in 2022.
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Applied Materials gets stung by the semiconductor shortage
Applied Materials generated $6.25 billion in revenue last quarter, an increase of 12% over the prior-year period, while adjusted earnings increased 13% year over year to $1.85 per share. The numbers fell short of consensus estimates as analysts were expecting $1.90 per share in earnings on $6.35 billion in revenue.
As it turns out, Applied Materials' top and bottom lines were at the lower end of the guidance it issued in February. It appears the supply chain improvements the company was hoping for didn't materialize. The guidance suggests more pain is in the cards for Applied Materials.
The company anticipates $6.25 billion in revenue this quarter, give or take $400 million. Earnings are expected to range between $1.59 and $1.95 per share. For comparison, Applied Materials posted non-GAAP (adjusted) earnings of $1.90 per share on a record quarterly revenue of $6.20 billion in the third quarter of fiscal 2021, which means its pace of growth is expected to slow even further. In fact, the company's bottom line could shrink over last year at the midpoint of its guidance range.
NASDAQ: AMAT
Key Data Points
Applied Materials CEO Gary Dickerson said on the company's latest earnings conference call: "During February and March, we successfully resolved some key component bottlenecks only for this progress to be offset in April as COVID-related shutdowns further disrupted already stretched supply. These shutdowns are impacting a small number of our suppliers and ultimately delayed around $150 million of revenue in the quarter."
Dickerson added the "supply situation continues to present multiple challenges." The company claims it is trying to work through the challenges by deepening its supplier relationships and accelerating the rollout of its equipment at customer sites. However, with the semiconductor shortage expected to persist through 2024, things could get worse for Applied Materials before the situation starts improving.
So, does this mean that investors should sell Applied Materials stock and cut any further losses? Or should they keep accumulating the stock given the company's solid long-term prospects?
What should investors do?
Applied Materials' near-term outlook may not appear healthy, but the company remains upbeat about its long-term prospects.
After all, the company expects spending on wafer fabrication equipment (WFE) to exceed $100 billion this year following last year's outlay of almost $90 billion. What's more, WFE spending is expected to reach $142 billion by 2022 as per a third-party estimate, indicating that the market is set up for secular growth.
Not surprisingly, Applied Materials expects the demand for its offerings to remain strong through 2023 and 2024. The company has a robust backlog of orders to back up that expectation. CFO Brice Hill remarked on the earnings call that Applied Materials has more than two quarters of backlog looking forward. Even better, the company's backlog has continued growing over the past few quarters thanks to the rise in customer orders and the supply chain constraints that have kept Applied Materials from fulfilling them.
The company didn't put a number on the amount of its backlog last quarter. But it is worth noting that it had a record $8 billion worth of backlog at the end of the fiscal first quarter, and it should have increased last quarter as well, going by management's comments. Applied Materials should be able to convert that backlog into revenue as it procures enough components to complete the shipment of its machines to customers.
Additionally, the company expects margin pressures to ease from the next quarter thanks to "pricing adjustments, manufacturing cost reductions, logistics improvements, and product reengineering." Longer-term, Applied Materials expects an improved supply chain to bring down costs and lead to improved volumes and product mix, all of which should rub off positively on its margins and earnings.
As such, patient investors can consider buying more shares of Applied Materials while they are still down as the company seems to have a bright future. The sell-off has brought this semiconductor stock's price-to-earnings ratio down to 14, which is a discount to its five-year average multiple of 18.6. With Applied Materials expected to clock double-digit earnings growth annually over the next five years, buying the stock with a long-term investment horizon may turn out to be a prudent move.
