AMAT Stock Prediction: The Future of AMAT Looks Promising After Release of Q2 Result

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Source: Wikipedia

Summary:

  • Trade war between US and China could affect AMAT by reducing sales to their largest customer base
  • Falling demand for Memory Chips and Display Market Segment is affecting net sales
  • Effective AMAT growth strategy in their Service Segment
  • Strong focus on R&D in the future to improve net sales
  • Bullish I Know First long term AMAT stock prediction and given a buy rating for the next quarter

AMAT’s Performance In Q2

Applied Materials (AMAT), one of the largest producer of semiconductor manufacturing equipment, might be facing some troubles from trade wars, a drop in overall smartphone consumer demands as well as stiff competition in display technologies. AMAT stock’s competitors such as KLA-Tencor and Lam Research also gave a similar downbeat outlook this quarter. Despite that, AMAT’s transition to more cloud data centers, 5G infrastructure, IoT and automotive technologies will pave the way for growth in 2020. The semiconductor equipment market is forecasted to drop 8% in 2019 but face a growth of 5% in 2020 which is one of the strongest support points for positive AMAT stock prediction.

In the latest quarter earnings report that was released on 16 May 2019, AMAT surprised investors with better than expected quarterly earnings. Earnings Per Share (EPS) came in at $0.70 beating analysts’ predictions by $0.04 partly due to stock buybacks and excellent financial execution by the top management. Over a five year period, AMAT has bought back 28% of the shares to generate a substantial shareholder value in the years to come.

The third quarter might bring in an EPS of $0.64, as the market for display, DRAM and memory is stabilizing, whilst the the interest in foundry/logic climbs and service experiences a slight growth over the next quarter. AMAT also brought in a revenue of $3.54 billion in the second quarter as compared to analyst’s predictions of $3.48 billion. The Return On Equity (ROE) is 49.38% and the net margin in 22.10%. The year to year revenue for the quarter was down 22.7% and the EPS was down $0.52.

Trade Wars Between US and China

AMAT Stock prediction
Source: Shutterstock

A large portion of AMAT’s quarterly revenues come from China, with the first quarter bringing in about 26% of the earning and the second quarter bringing in an even greater 28%. The CEO, Gary Dickerson, commented during a speech in Semicon China that “a strained relationship between China and the U.S. can put decades of economic growth at risk”. United States is the world’s leading provider of semiconductor manufacturing equipment and about 84% of equipment manufactured in the US get exported to countries such as China, Korea, Taiwan and Japan.

AMAT Stock prediction
Source: Market Realist

The trade war between US and China could lead to an economic setback for AMAT for being so heavily reliant on China as one of their largest customer base. Tariffs imposed on US imports in China could be damaging. Moreover, China’s government is pumping in a lot of money in a bid to create their own indigenous semiconductor industry, possibly creating competition for US owned semiconductor equipment industries like AMAT. This could spell trouble for AMAT in the long run unless they find ways to expand in other markets besides the Asia Pacific region which in 2018, accounted for 85% of all net sales.

However, Dickerson assured investors in the second quarter Earnings Conference Call that, “We expect we’re going to maintain a very strong share position in China”. This is consistent to what we have observed in 2019, with a 2% growth from the first to the second quarter.

Falling Demand for Memory Chips

AMAT Stock prediction
Source: World Fab Forecast Report

The falling demand for consumer electronics led to a setback in the global semiconductor industry which explains the declining sales that AMAT is facing. In the first quarter, Samsung, one of AMAT’s biggest clients which accounted for 13% of the net sales in 2018, faced its lowest operating profits in 5 years due to the low demand in cloud services and smartphone markets for both DRAM and Memory Flash chips which forced the prices of the chips to drop. The decline in consumer electronics market naturally impacted AMAT.

“The second major factor impacting this year ahead is the memory cycle that the industry has been navigating for the past several quarters. Recent data shows that NAND pricing is stabilizing and inventory levels are down from their peak, although they still remain above normal levels. DRAM is not as far along in the correction cycle, with high inventory levels and prices still falling.”, expressed Dickerson in the recent Conference Call. Customers are having an oversupply and are continuing to work through their inventories.

In the second quarter in 2018, foundry/logic comprised of 30%, DRAM took up 32% and Flash took up 38% of AMAT’s net sales. Whereas in 2019, there was a year to year increase of 28% in foundry/logic, a drop of 14% in DRAM and a drop of 14% in Flash. The steady growth in the AI market led to a strong demand for foundry/logic products. AMAT’s semiconductor segment still accounted for 62% of its total revenue. Overall, the semi sector will start to stabilise with the increase in foundry/logic to compensate for the drop in DRAM and Flash.

Decline in Demand for Display Market Segment

AMAT’s Display Segment technology in backplanes for 6G and 8G LCD panel plants and flexible OLEDs is falling behind their competitors more advanced technologies, leading to a fall in market share despite projected increases in the market for OLED investments and projections in 2019.

AMAT Stock prediction
Source: Samsung

In addition, technology for flexible OLED screens have a long way to go in terms of improvement and pricing for the consumer market. Samsung’s latest Galaxy Fold takes a blundering hit of bad press releases. The phone has received many complaints of a lack of durability for the foldable screens.

Dickerson said  “We are still anticipating that our 2019 display revenues will decline by about a third from 2018’s level as customers push out investments.” Revenues from the Display segment, accounted for only 10% of the total revenues and experienced a year over year decline of 51.6%. However, AMAT strongly believes in the growth potential of the Display market segment. Hence, as material innovation improves with more capital investments in R&D, the interest level in newer display technologies such as rigid and flexible OLED technologies will be sure to rise.

Applied Materials Global Services Continues to Produce Results

AMAT Stock prediction
Source: Market Realist

Applied Global Services is the only product segment which had a year over year increase in revenue of 4.1% from the year prior. More than 20% of their semiconductor installed base is covered by long term agreements which will continue to generate revenue for AMAT. They boast world class renewal rates for the services they provide by continuously providing recurring value to their customers. AMAT has the largest customer base of 40,000 semi-installed base in the industry. With a greater emphasis being placed on providing better service for their customers, AMAT would easily be able to take advantage of this market share and grow their service segment.

AMAT’s Focus for the Future

In AMAT’s Second Quarterly Conference Call that took place on 16 May 2019, Dickerson announced that AMAT’s strategic priorities are to accelerate innovation for the customers while creating sustainable value with their technology through a strong emphasis on R&D.

They aim to achieve this goal through creating R&D centers in New York and an advanced packaging lab in Singapore. With more focus placed on R&D to create new products that can advance the chip manufacturing process, AMAT’s semiconductor technology can continue to capture a large market share in 2020. AMAT is banking on new materials innovation give them leading edge technology in foundry/logic.

Moreover, AMAT plans to expand their engagement in the AI sector, seeing as AI is at the “beginning of the biggest wave we’ve ever seen”. AMAT aims to be a the forefront of this wave of AI, aiming to play a bigger role and even hosting an AI Design Forum this coming July.

Since Applied Global Services is a growing market segment that is not affected by the industry cycles, their aim to put more emphasis into their service segment is a good growth strategy. By acquiring even more long term agreements for their semi service, AMAT can continue to generate even more revenue.

Conclusion

AMAT Stock prediction
Source: Wall Street Journal

In conclusion, AMAT’s semiconductor segment is said to stabilize, whilst their display and service segment will face growth in the upcoming quarter.

Overall, the semiconductor equipment manufacturing sector is experiencing a decline in stock prices. Dickerson feels confident that 2020 will be a promising year for AMAT as long as they maintain the largest market share.

Financial Analysts give AMAT a buy rating for the upcoming quarter. I would also give AMAT a buy rating given that they might be bottoming out and business appears to be stabilising.

Current I Know First AMAT Stock Prediction

The I Know First machine learning algorithm currently has a positive outlook for AMAT. The stock is bullish over 1 month, 3 months and a year horizon. It is most bullish for the 1 year period with a signal of 138.86 and predictability indicator of 0.85.

AMAT Stock prediction

How to interpret this diagram

I Know First Algorithm Past Success with AMAT Stock Prediction

On 24 January 2019, I Know First algorithm made a bullish AMAT stock prediction for a time frame of 3 months. As shown below, during the time period from 24 January 2019 to 24 April 2019, AMAT grew by 29.58%, confirming I Know First’s AMAT stock prediction.

AMAT Stock prediction
AMAT Stock prediction

This bullish Applied Materials stock forecast was sent to the current I Know First subscribers on 24 January 2019.

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Please note-for trading decisions use the most recent forecast.