Summary
- Applied Materials was vague about guidance in the last earnings call as competitors provided dour assessments for 2023.
- Ideally, we will learn the impact of capex cuts by memory suppliers on Applied Materials Semiconductor Services segment in its latest call.
- Ideally, Applied Materials will provide more granularity on China sanctions in light of Japan and The Netherlands agreeing to U.S. sanctions.
Applied Materials (AMAT) is scheduled to deliver its Fiscal Q1 2023 earnings on Thursday, Feb. 9.
In the previous FQ4 2022, AMAT reported record quarterly revenue of $6.75 billion, up 10% YoY. Quarterly non-GAAP EPS of $2.03 was up 5% YoY. In AMAT's Semiconductor Systems segment, revenues were $5.04 billion.
In the first quarter of fiscal 2023, Applied expects net sales to be approximately $6.70 billion. Non-GAAP adjusted diluted EPS is expected to be in the range of $1.75 to $2.11. The Semiconductor Systems segment, revenues of $5.15 billion are expected.
Semiconductor Systems Segment Analysis
AMAT reported semiconductor revenue guidance of $5.15 billion. That represents a dismal 2.2% QoQ increase. One data point says little. What's important are AMAT's revenues in comparison to competitors and peers. If an equipment company loses share to competitors, it means its products are not "best-of-breed." As customers buy more equipment to increase capacity to make more chips, it buys more equipment from existing suppliers.
In Chart 1, I show YoY revenue change for 2022/2021 for the Top seven semiconductor equipment companies. Data for all competitors of AMAT are actual, and that for AMAT is based on its guidance.
The mean revenue growth for these companies was +8.6%. It shows AMAT's YoY growth of 7.4% indicating that AMAT lost share to major competitors. Importantly, while AMAT competes against each of these companies to varying degrees, its major competitor is Lam Research ( LRCX ), which grew 12.9% YoY, according to our report entitled Global Semiconductor Equipment: Markets, Market Shares and Market Forecasts .
AMAT and LRCX are competitors in Deposition and Etch equipment. In fact, in 2021, 94% of Lam's revenues were in deposition and etch and 67% of Applied's revenues were in deposition and etch. This means they are strong competitors, and positive results for AMAT should mean negative for LRCX, since they are competing for sales from the same semiconductor customers. Yet, share performance is nearly identical indicating that investors buy semi cap stocks as a sector rather than performing a deep-dive analysis of each company.
Revenue growth for KLA (KLAC) was the greatest at 32.2% YoY growth. In 2022, 94% of KLAC's revenues were in metrology/inspection but just 7% of AMAT's revenues were in metrology/inspection. KLAC's equipment demand increases as semiconductor technology node decreases. As the industry moves to smaller nodes requiring more sophisticated methods for inspection chips, KLAC is the better choice among the three.
Chart 1
Not only has AMAT underperformed in 2022, it has been underperforming since 2013 when new management took control from the AMAT acquisition of VSEA. Chart 2 shows the downward trend line between 2013 and 2022. It also shows how AMAT moved $331 million from 2018 into 2019 to improve market share (orange bars).
Based on estimated global revenue growth of semiconductor equipment in 2022 from SEMI of 5.8%, AMAT's estimated growth of 7.4% moved the company up to a share of 17.1% in 2022 from 16.9% in 2021. Nevertheless, the trendline continues to show a negative downward trend.
Chart 2
For the top semiconductor equipment companies, I forecast that ASML ( ASML ), which has been stymied by supply chain problems in 2021 and 2022, will exhibit positive growth in 2023 because of production limitations, as shown in Chart 3. ASML has a backlog of 100 EUV systems with an ASP of $200 million. Unlike memory IC companies, logic/foundry semiconductor companies are not likely to cancel orders despite the downturn and oversupply of chips in 2023 as leading foundry companies migrate to smaller technology nodes. I presented my analysis in my Jan. 5, 2023, Seeking Alpha article entitled "Memory And Logic: Two Different Chips, Two Different Trajectories In 2023."
Chart 3
Investor Takeaway
Negative Capex Growth in 2023 and 2024
I presented my thesis in mid 2021 that the extraordinary amount of capex spend for equipment will lead to a severe downturn in 2023 for equipment companies because of an oversupply of capacity and chips. That market will be down 20%-plus, and all analysts are now projecting this decrease in 2023. I reconfirmed my 2021 analysis in mid 2022, and investors can better understand my thesis in a July 11, 2022 Seeking Alpha article entitled " Assessing My 2021 Call For A Likely Semiconductor Equipment Meltdown In 2023 Impacting Applied Materials ."
The current macro factors have clouded the issue - less demand for consumer products resulting in capex cuts by Micron and SK hynix, and the China sanctions. What would have been a severe hit in 2023 has been moved forward into 2022, lessening the shock in 2023. But my thesis calls for a continued slowdown in 2024.
In the recent earnings calls from AMAT competitors LRCX and KLAC, while both companies beat quarterly consensus for revenue and EPS, they guided the March quarter to be below consensus expectations. Incidentally, they also anticipate the WFE market to be down by 20% in 2023, confirming my analysis of a strong downturn in 2023 equipment I made 18 months ago.
However, AMAT CEO Dickerson, in its previous earnings call stated:
"We're not going to guide on overall WFE for '23. But we're in a very strong position."
Hmm, let me get this straight, AMAT underperformed KLAC and LRCX in 2022, and both companies guided -20% YoY growth and AMAT is in a very strong position and won't guide. Investors should be weary of this, based on continued share performance over the past 10 years (Chart 2) even by moving $331 million in revenue from 2018 to 2019.
Watch for Memory Impact on AMAT
A key point to watch in the earnings call is the impact of capex cuts by Micron ( MU ) and SK hynix ((HXSCL)) on Applied Materials.
In the company's previous FQ4 2022 earnings call, BofA analyst Vivek Arya asked the question:
"Recently, Micron said it could be down even more than that. Have you noticed almost 50% cancellation of orders from them?"
AMAT CFO Brice Hill replied:
"So we're not giving a guide for Q2. We are highlighting the record backlog and the fact that we're constrained and the fact that in several equipment lines, we're behind on customer orders."
Instead of directly answering, he deferred the question by touting AMAT's backlog.
Watch for China Sanction Impact on AMAT
Another key point to watch in the earnings call is the impact of capex cuts from China sanctions on Applied Materials. Since its last earnings call, Japan and The Netherlands agreed to abide with U.S. Sanctions.
In the company's previous FQ4 2022 earnings call, Evercore ISI analyst C.J. Muse asked the question:
"Yes. I was hoping to clarify one thing first on China. And really, the question is, what changed between October 12 with your press release and then October 30, where it looks like there really wasn't much of an impact at all?"
Brice Hill again replied:
"So relative to the preannouncement that we did, we talked about a $400 million impact, plus or minus $150 million for the China trade change. And then as we work through it, that impact ended up being less around $280 million.
And so, over $200 million of good news from an execution and delivery perspective, finishing product and completions in the field. So it was really those two things. It was little bit better than our initial estimate and execution was excellent in the last couple of weeks of the quarter."
Share Price Metrics
Chart 4 shows a comparison of share price performance for non-Japanese companies analyzed above in Chart 1, comparing AMAT, LRCX, KLAC, and ASML. For the past one-year period, AMAT has also underperformed competitors in this metric. AMAT fares worse at -15.3% while KLAC fared best at +6.7%.
Chart 4
Chart 5 shows comparable data for Gross Profit Margins, with KLAC clearly ahead of the pack and with AMAT and LRCX at the bottom.
Chart 5
Investors need to "separate the wheat from the chafe" when listening to AMAT earnings call, particularly guidance. Statistically they underperformed top competitors in 2022 and yet state they are in a "very strong position" in 2023 when KLAC and LRCX both guided down 20%.
Frankly, after analyzing AMAT since 1985, I don't concur, and rate the company a Sell.
For further details see:
Applied Materials: Important Questions Are Still Unresolved Leading Up To Today's Earnings Call