Record results, but worse than market expectations

Applied Materials, one of the world’s largest chip makers, posted strong fiscal 4 quarter results, showing a 51% increase in net income and a 30% increase in revenues. Applied Materials’ quarterly revenues increased to $ 6.12 billion from $ 4.69 billion a year earlier, falling short of the consensus forecast of $ 6.39 billion. Net income for the quarter ended October 31 was $ 1.71 billion, up from $ 1.13 billion for the fourth quarter of the previous fiscal year. Earnings per share increased to $ 1.89 from $ 1.23. Adjusted earnings of $ 1.94 per share, slightly below the market estimate of $ 1.96 per share.

We liked the company’s earnings, but investors were disappointed that the results were below consensus on both revenue and bottom line. The company linked its weaker-than-expected quarterly results to supply chain problems. In addition, the company noted that these problems will continue to negatively affect its performance in the current quarter. However, we were impressed that strong demand for Applied Materials products in the face of global semiconductor shortages allowed the company to record net profit and revenue for the entire fiscal year. We are increasing our target valuation for the company’s stock from $ 175 to $ 190.

Applied Materials is benefiting from significant growth in chip demand during the COVID-19 pandemic, and the company sees new growth opportunities, marking a leap in automotive chip production. Demand from DRAM customers like Samsung may rebound next year, while demand from customers like TSMC will remain strong. Applied Materials’ unique business model as a high-tech semiconductor material solutions provider will continue to generate ROI of up to 40%. We believe that next year, as the supply chains stabilize, the company’s business will begin to receive tangible support.

AMAT is the top semiconductor equipment supplier catering to most major verticals, other than lithography. Its semiconductor business typically represents ~65% of total revenue (excluding services). The company is also diversified beyond semiconductors and is a major supplier of equipment to build flat panel displays (LCD) and an increasingly larger participant in the emerging OLED space.