What Happened?

Shares of semiconductor machinery manufacturer Applied Materials (NASDAQ:AMAT) fell 9.2% in the pre-market session after the company reported weak third-quarter (Fiscal Q4 2024) results. Its revenue guidance for the next quarter slightly missed. Sales growth was also underwhelming during the quarter as revenue beat by a narrow margin. The company attributed some of the weakness to headwinds which impacted sales in China.

Although key operating segments exceeded analysts' estimates by small margins, underlying weaknesses became more apparent when data was aggregated by product categories. Specifically, DRAM sales fell below Wall Street's estimates, declining by 10% year-on-year, given tough comparisons amid elevated purchases from China in the previous year. Zooming out, we think this is a challenging quarter for the company.

Following the results, Morgan Stanley analyst Joseph Moore lowered his price target from $185 to $179, calling out uncertainty around export controls. Moore added, "Consistent with our outlook that 2025 may not be as good as one expected 6 months ago, expectations for foundry orders from Intel and Samsung have receded, ICAPS ex-China appears to be going through a prolonged correction, and NAND has yet to recover from a very low base."

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What The Market Is Telling Us

Applied Materials’s shares are quite volatile and have had 18 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.

The biggest move we wrote about over the last year was 9 months ago when the stock gained 13% on the news that the company reported fourth-quarter results that exceeded analysts' revenue and EPS expectations, which is especially impressive given how many semis companies missed and talked about macro headwinds during the earnings season. Free cash flow improved significantly from the previous quarter. Revenue guidance for the next quarter also came in ahead of consensus.

Management highlighted some of the drivers of the strong outlook. Firstly, the AGS (applied global services) segment, which grew 8% during the quarter and stands at a $6 billion annual run rate, had the potential to achieve double-digit growth in the coming quarters. Also, the DRAM business continued to contribute strongly to the semiconductor systems segment as the company continued to gain market share. Underpinning the company's growth thesis for the coming quarters are three broad assumptions. 1.) A semiconductor market growing faster than GDP 2.) An equipment market growing even faster than the semiconductor market 3.) AMAT's equipment business outgrowing the market.