Where Will Applied Materials Stock Be in 1 Year?

Applied Materials (AMAT -4.58%) posted its latest earnings report on Nov. 17. For the fourth quarter of fiscal 2022, which ended on Oct. 30, the semiconductor equipment maker's revenue rose 10% year over year to $6.75 billion, beating analysts' estimates by $310 million. Its adjusted EPS rose 5% to $2.03 and cleared the consensus forecast by $0.29.

Applied Materials' earnings win allayed some concerns about the broader slowdown of the semiconductor market and the unpredictable regulatory headwinds, but its stock has still shed about a third of its value over the past 12 months. Could it recover in fiscal 2023 as the industry gradually stabilizes?

Image source: Getty Images.

A bellwether of the semiconductor industry

Applied Materials is one of the world's largest suppliers of semiconductor equipment. In fiscal 2022, it generated 73% of its revenue from its semiconductor systems segment, which supplies a wide range of manufacturing equipment to the foundry, logic, and memory chip industries. It generated 21% of its revenue from its applied global services segment, which installs and maintains that equipment. Another 5% of its revenue came from its display and adjacent markets business, which primarily supplies equipment for producing LCD and OLED screens.

Its growth is cyclical and determined by the global demand for new semiconductors. The industry suffered its last major slowdown in fiscal 2019, which was mainly caused by sluggish smartphone sales and the overproduction of memory chips, but recovered over the following two years as new 5G devices and OLED displays hit the market. Stay-at-home trends during the pandemic -- which lit a fire under the PC, gaming, and data center markets -- amplified its cyclical recovery.

Bracing for another cyclical slowdown

But as the following table illustrates, Applied Materials' accelerating growth in fiscal 2021 set it up for tough year-over-year comparisons in fiscal 2022.

Data source: Applied Materials.

In fiscal 2022, its growth decelerated as consumers bought fewer 5G devices, PC sales cooled off in a post-pandemic market, and macroeconomic headwinds throttled enterprise spending on big cloud software deals.

That pressure reduced Applied Materials' adjusted gross margin by 90 basis points year over year to 46.6% in fiscal 2022, and its adjusted EPS rose only 13%, compared with its 64% growth in fiscal 2021.

Therefore, the question on everyone's mind is whether fiscal 2023 will be another gloomy year like fiscal 2019. Sluggish economic growth, ongoing supply chain challenges, and the Biden administration's new export bans on sales of advanced semiconductors to China all certainly suggest the chipmaking industry is headed for another cyclical downturn.

Investors should expect slower growth in fiscal 2023

The midpoint of Applied Materials' guidance for the first quarter of fiscal 2023 calls for 7% year-over-year revenue growth. That would represent a deceleration from its 10% growth in the fourth quarter, but it still easily surpassed analysts' expectations for just 2% growth. Therefore, Wall Street's projections for a 5% revenue decline with a 12% drop in EPS in fiscal 2023 might be a bit too gloomy.

During the conference call, CEO Gary Dickerson said while it was "too early to forecast 2023 with any precision," the company was still bracing for a "pullback in overall wafer fab equipment spending next year" as softer demand for consumer electronics and PCs offset the "robust" growth of the automotive, industrial, and energy markets. Dickerson also predicted it could lose "up to $2.5 billion" in potential revenue (10% of analysts' estimates) in fiscal 2023 to the new export bans against Chinese chipmakers. He believes Applied Materials could potentially reduce that impact to a range of $1.5 billion to $2 billion, depending on "how quickly the government provides licenses and approvals" and "how impacted companies refocus their investments."

So for now, it seems Applied Materials will report much slower growth for at least the next few quarters. Its stock might seem reasonably valued at 16 times forward earnings today, but there also aren't any near-term catalysts that will drive its stock significantly higher over the next 12 months. It's also arguably less appealing than its Dutch industry peer, ASML Holding (ASML -7.09%) -- which monopolizes the high-end lithography market, has limited exposure to the export bans on China, and is expected to continue growing through the broader slowdown of the semiconductor market in 2023.

Based on all these facts, I expect Applied Materials' stock to trade sideways and underperform the broader market next year. But over the long term, it should gradually rally higher as the semiconductor market continues to expand.