Applied Materials Analysts Break Down Q2 Beat

Semiconductor equipment maker Applied Materials, Inc. AMAT reported better-than-expected fiscal second-quarter results Thursday, sending its shares solidly higher.

The company issued in-line third-quarter guidance.

The Analysts

Morgan Stanley analyst Joseph Moore maintained an Equal-weight rating on Applied Materials with a $40 price target. 

Wells Fargo Securities analyst Aaron Rakers maintained an Outperform rating and lifted the price target from $45 to $52.

KeyBanc Capital Markets analyst Weston Twigg maintained an Overweight rating and $56 price target.

Morgan Stanley Optimistic On Equipment Stocks

Applied Materials' results were better than feared, coming in similar to peers, with strength in logic and foundry customers, Moore said in a Friday note.

Although the company is "not calling a bottom," it's looking to maintain revenues at these levels through 2019, with some recovery likely in 2020, the analyst said. 

Morgan Stanley is cautious on memory spending and is projecting further declines in wafer fab equipment spending in calendar 2020.

The weakness could be offset by a rebound in display, continued services growth and a likely strong level of logic spending from Intel Corporation INTC next year, Moore said. 

"We are more optimistic on equipment stocks than their memory counterparts, but we still see potential negative variance as memory erodes." 

See also: Applied Materials Supplies Over 25% Upside

Wells Fargo: Applied Materials Looks For Positive Spending Setup In 2020

Applied Materials' continued expectations of a positive spending setup into calendar 2020 — with likely year-over-year growth in wafer equipment spending — have triggered a positive stock reaction, Rakers said in a Thursday note. 

The company sees signs of stabilization in NAND flash and an ongoing correction in DRAM, the analyst said. 

Among Applied Materials' business segments, semi systems revenue declined less than expected, and the display and adjacent markets revenue fell in-line with guidance, Rakers said. 

Applied services revenue increased slightly, he said.  

The company reported a 24 percent year-over-year decline in China revenue, accounting for 28 percent of the total, and called for China WFE to decline in 2019, the analyst said.

Yet Applied Materials said demand for foundry and logic remained strong, driven by trailing node applications for sensors and IoT devices, according to Wells Fargo. 

The sell-side firm lowered its calendar year 2019 and 2020 estimates.

KeyBanc Sees Favorable Setup In 2H

Applied Materials will benefit from improving demand in 2020 and good long-term drivers, Twigg said in a Thursday note.

The second-quarter EPS upside was driven by revenue, operating discipline and buybacks, the analyst said. 

KeyBanc expects the company to benefit this year from strong logic, foundry and other customers, even as it projects that memory-based capex will fall by around 31 percent.

Applied Materials guided for a mid-to-high-teens drop in wafer fab equipment demand year-over-year in 2019 and a 33-percent or so decline in display revenues, Twigg said. 

KeyBanc estimates 8-percent growth for the semiconductor segment in 2020; 9 percent for services; and 22 percent for display as OLED efforts resume.

The company's shareholder returns are compelling, Twigg said. 

Although expecting semiconductor equipment stocks to be rangebound in the near term, KeyBanc sees a favorable setup in the second half as conviction in a demand recovery in 2020 improves.

"We view AMAT as very well positioned over the long term, with broad-based semiconductor customer exposure, high cash generation, and good execution, and we remain Overweight," the analyst said. 

The Price Action

Applied Materials shares were up 2.5 percent at $42.70 at the close Friday. 

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Photo courtesy of Applied Materials.