Applied Materials Orders Cause Concern Demand Has Topped Out

  • Stock falls as some investors bet production surge has peaked
  • CEO says market for chip, display equipment now more stable

Applied Materials Inc., the biggest maker of machinery used to produce chips and displays, predicted a jump in sales as customers spend on equipment needed to modernize production. The stock fell on concern that orders may have peaked.

The Key Points

  • Revenue in the first quarter ending in January will increase to a range of $3.2 billion to $3.34 billion, Santa Clara, California-based Applied Materials said Thursday in a statement. That compares with an average analyst estimate of $3.1 billion, according to data compiled by Bloomberg.
  • Profit, excluding certain costs, will be 62 cents to 70 cents a share, the company said. Analysts on average projected 58 cents.
  • New orders rose 25 percent to $3.03 billion in the fourth quarter from a year earlier, but declined 17 percent from the third quarter.
  • The stock fell as much as 7.9 percent in extended trading after the earnings announcement, before paring its decline to about 1 percent at 6 p.m. in New York. The shares closed Thursday at $30.73 and have jumped 65 percent this year.

The Big Picture

Applied Materials’ reach makes its forecast an indicator of confidence in future demand throughout the electronics industry. The increasingly difficulty of squeezing out advances in production for chips and display screens is forcing Applied Materials’ customers to spend on new machinery to ensure their factories remain competitive. After a surge in orders earlier this year, component makers may be slowing down purchases of new gear as they concentrate on installing and using what they’ve already bought.

Street Takeaways

  • Some investors had expected Applied Materials to forecast even higher sales, according to Edwin Mok, an analyst at Needham & Co. While orders surged in the quarter ended Oct. 30 from a year earlier, the quarter-to-quarter decline may be creating concern, he added.
  • “This decline was more than I expected, but in line with what normally happens after few quarters of aggressive spending -- a digestion period ensues,” Patrick Ho, an analyst at Stifel Nicolaus, said of the order numbers.

CEO Interview

  • Some investors don’t recognize that the market for chip and display equipment isn’t as volatile as it once was. While there will be fluctuations in quarterly order rates, a single quarter-on-quarter decline doesn’t herald a downturn, Chief Executive Officer Gary Dickerson said in a phone interview.
  • “There is a group out there that wants to call the peak, but we said that business is going to be up,” he said. “I am very bullish. You could see very strong growth going forward. The industry itself is bigger and less volatile.”
  • The company sees ‘strong’ orders in the current period, Dickerson said.
  • Applied Materials projects a 5 percent increase this year in the market for all equipment that goes into chip plants, compared with an earlier forecast of no growth. Dickerson said he’s optimistic the total market also will see an increase in 2017.

The Details

  • Orders for semiconductor systems were $1.83 billion in the fourth quarter compared with $2.22 billion in the preceding three months. Display makers ordered $387 million of new gear in the quarter, down from $803 million three months earlier.
  • Fourth-quarter net income was $610 million, or 56 cents a share, compared with $336 million, or 28 cents a share, a year earlier. Revenue in the period rose 39 percent to $3.3 billion.
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