The downbeat 2019 outlook that Applied Materials (AMAT) just gave looks quite a lot like the ones recently given by peers such as KLA-Tencor (KLAC) and Lam Research (LRCX) . However, the company did offer some more upbeat comments about expected 2020 demand, and one can't ignore the fact that its shares (like those of many peers) remain fairly cheap.
To recap: Applied rose 2.5% in Friday trading (amid a 1% drop for the Nasdaq) after beating its April quarter estimates -- more so on EPS than revenue -- and issuing roughly in-line July quarter guidance. While EPS is benefiting to an extent from stock buybacks and good financial execution, revenue still fell 23% annually in the April quarter amid nosediving orders from memory makers, and the midpoint of Applied's sales guidance implies it will be down 21% in the July quarter.
In addition, on its earnings call, Applied said it still expects industry wafer fab equipment (WFE) spend to drop by a mid-to-high teens percentage this year, a view that more or less meshes with the ones KLA and Lam provided after issuing their March quarter reports. And like KLA, the company forecast equipment spending by foundries (chip contract manufacturers) and logic (processor) manufacturers will rise slightly this year, while spending by DRAM and NAND flash memory makers will drop sharply.
But Applied did say it expects 2020 to be "a growth year [for] WFE," with the company seeing "a favorable setup" for both foundry/logic and memory spending. And with regards to memory in particular, Applied said it sees DRAM and NAND inventory levels normalizing as 2019 progresses (NAND is declared to be farther along than DRAM), setting the stage for capacity-expansion investments in 2020. And in comments that have some relevance for firms in the OLED supply chain such as Universal Display (OLED) and Coherent (COHR) , Applied forecast its display equipment business will get a lift in 2020 from greater OLED panel adoption within mobile devices.
The company also reiterated some of its previous talking points about chip equipment industry trends. Among them: The memory industry is in much better financial shape during the current down cycle than it was in previous down cycles; demand for cutting-edge chips in end-markets such as cars, cloud data centers and IoT devices is driving investments in advanced manufacturing processes and packaging technologies; and the capital-intensity of the DRAM and NAND industries (i.e., the amount of equipment spend needed to drive a given amount of production growth) is steadily rising.
There's still certainly a risk that things don't play out in late 2019 and 2020 the way that Applied expects, particularly if trade tensions and/or Chinese macro pressures remain overhangs. And looking just at the upcoming weeks, there's a risk that chip equipment stocks could give back more of their recent gains as markets digest negative trade news.
Nonetheless, at a time when Applied and many other chip equipment makers sport forward P/Es in the low or mid double digits, Applied did make a case for being cautiously optimistic about industry trends beyond this year. Those looking at the group long-term should take note.
