Analysts Shrug Off Applied Material's Weak Q2 Guidance; RBC Says Sector Bottom Likely In 3-4 Months

Applied Materials, Inc. AMAT reported Thursday after the market close with forecast-beating fiscal first-quarter results and weak Q2 guidance. 

The Analysts

Morgan Stanley analyst Joseph Moore maintained an Equal-weight rating and $40 price target for Applied Materials shares.
D.A. Davidson analyst Thomas Diffely reiterated a Buy rating and $55 price target.
KeyBanc Capital Markets analyst Weston Twigg maintained an Overweight rating and $56 price target.
RBC Capital Markets analyst Mitch Steves maintained an Outperform rating and $45 price target.

Morgan Stanley: We Like Applied Materials' Conservatism

Applied Materials said very little beyond the current quarter, forecasting a challenging environment and asserting that the challenges will take time to correct, Morgan Stanley's Moore said in a Friday note. 

The analyst said he likes the conservatism, but is worried about the rapid rate of deterioration of memory, which leaves open the possibility of further downward revisions.

"NAND cash flows in Q1 will no longer fully fund NAND capex, and while DRAM cash flows are much better, they are fading fast, which at best limits visibility for equipment vendors," Moore said. 

Morgan Stanley is in-line with consensus estimates for 2019, but remains below consensus for 2020 given the sell-side firm's cautious memory view.

Notwithstanding the tough semis environment, Morgan Stanley said it sees value in the stock. 

See also: Wall Street Reacts To Applied Materials' Quarter

DA Davidson: Long-Term Drivers Remain Firmly In Place

Applied Materials' industry view is in-line with the rest of the semiconductor equipment makers, Diffely said in a Friday note.

The analyst said he expects wafer equipment spending to be down 15-20 percent in 2019, with memory being the weakest, while logic and foundry are likely to be slightly up, helped by the 10nm ramp at Intel Corporation INTC and a 7 nm ramp at Taiwan Semiconductor Mfg. Co. Ltd. TSM.

Apart from the headwind, Applied Materials is also exposed to a display market that is providing additional pressure in 2019, Diffely said.

Despite modest growth in services, the analyst said he expects total revenue to dip over 15 percent in 2019.

Applied Materials is tightening opex while also increasing investment in R&D to drive growth, Diffely said. The focus on subscription contracts is a positive, which is likely to offset some of the weakness in the rest of the business, he said. 

D.A. Davidson sees key long-term drivers such as AI, big data, Industry 4.0 and OLED as remaining firmly in place, catalyzing revenue and earnings growth in the years ahead.

The research firm trimmed its estimates to reflect the near-term industry view.

KeyBanc: Good Time To Build Positions

Applied Materials' soft Q2 guidance reflects end market weakness in cloud, smartphones, PCs, autos, China and general seasonality, Twigg said in a Thursday note. 

The analyst said he expects demand to gradually improve through 2019.

A recovery should begin by the October quarter, as memory producers likely begin modest fab expansion to alleviate supply shortages, Twigg said. 

Although KeyBanc lowered estimates to reflect the near-term environment, it said it views the first half of 2019 as a good time to build positions.

RBC: Semi-Cap Will Bottom Over Next 3-4 Months

Following the Q1 results that came slightly ahead of the original guidance and the reduced guidance for Q2, the worst cuts are now behind Applied Materials, Steves said in a Friday note. 

The company's EPS guidance is at the midpoint of the historical peak-to-trough EPS range, the analyst said. 

EPS estimates could begin to revise upward around the October quarter, Steves said. 

"Net-net: while numbers have come down, we think this is the last material cut to estimates and believe memory/semi-cap will bottom over the next three to four months." 

The Price Action

Applied Materials shares were down 3.22 percent at $39.40 at the time of publication Friday. 

Related Link: Applied Materials Supplies Over 25% Upside

Photo courtesy of Applied Materials.