Double Top for Applied Materials Suggests Double Trouble

 | Aug 17, 2017 | 9:00 AM EDT
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Applied Materials (AMAT) reports after the close, and investors are expecting a solid quarter. But, with the shares forming a double top, could this stock be double trouble?

Analysts think AMAT will report $0.83 per share on $3.68 billion in revenue in its third-quarter fiscal 2017. Investors are expecting gross margins of 46.5% and an operating margin of 28.5%, which would be a big improvement over last year. Fiscal 2016, AMAT ended the year with a gross margin of 43%. With sales up 30% and operating profit up about 63% over last year, tech investors remain bullish on the company's prospects going forward.

Near term, demand is being driven by adoption of 3D NAND memory, the transition from 10-nanometer (nm) to 7nm, favorable demand/supply balance in the semiconductor market and strong demand for wafer fab equipment from China. Furthermore, Applied is seeing strong demand for its OLED (organic LED) manufacturing equipment. Chip demand from autos and mobile devices remains strong.

This quarter is typically a quiet one for tech companies. They save the best news for the analyst meetings and brokerage conferences that kick off the first week of September. Applied has scheduled an analyst meeting on Sept. 27.

In May, I thought Applied Materials needed a rest. I was concerned the company won't be able to produce the kind of revenue growth it has in the past. Last year, revenue grew 12% and this year analysts are looking for 31% growth. Earnings are expected to grow 73% this year. But, while revenue should continue to grow next year, it's not going to grow nearly as fast as this year. The consensus is forecasting revenue to grow only 4.6% next year.

While we will have to wait for the analyst meeting to get Applied's take on the wafer fab market, equipment spending is estimated to grow 3% in 2017 and is projected to push past $37 billion by 2019. Investors are hoping the company will be able to make the case for much higher fab spending. At the current run rate, Applied's revenue growth suggests the worldwide wafer fab market has surpassed the previous $37 billion estimate and could end 2017 closer to $40 billion. Earnings would really take off if the company can make the case for $47 billion in worldwide wafer fab equipment sales.

While investors are excited by AMAT's past performance, that's in the past. I think the excitement is about to come to an abrupt end. I am concerned the double top in the stock indicates tech investors are worried about a slowdown in fab spending. A double top in the stock and a slowdown in equipment sales will be double trouble for investors in Applied Materials.

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