Story Stocks^®

Applied Materials (AMAT -13%) is under pressure today after reporting its Q3 (Jul) results last night. This semicap company stayed true to form, delivering a solid EPS beat, with revenue also coming in a good bit above expectations. However, the negative reaction is from its Q4 (Oct) revenue guidance, which was below consensus estimates, reflecting particular weakness in its China business. Additionally, there were several downgrades from analysts (BofA, Summit Insights, DZ bank) this morning.

• In terms of why the guidance was weak, management pointed to three main factors. First, the digestion of capacity in China. In particular, AMAT had a large amount of shipments to China in FY23-24 and now sees its customers moderating their spend. As a result, it expects China to account for 29% of revenues in Q4, down from 35% this quarter. Second, AMAT is assuming its backlog of pending export licenses will not be issued in the next quarter. Finally, management noted uneven demand from leading-edge customers, driven mainly by market concentration and fab timing. This last point is worth pointing out as it differs from what AMAT has said in past quarters.
• Management had expected a steady ramp in leading-edge demand, accelerating through FY25-26, supported by 100% utilization on the leading-edge, increasing capex from cloud service providers, and strong pull from AI-related technologies, particularly in DRAM and HBM. However, the Q4 order pattern has not reflected this trajectory. Particularly, management suggested that companies have been a bit hesitant to make capital commitments given tariffs, trade, and other uncertainties. This is similar to what we heard from ASML (ASML) in its Q2 (Jun) report.
• Turning to Q3 segment performance, Semiconductor Systems, AMAT's largest revenue driver, reported a 10% yr/yr increase in revenue to $5.43 bln, with strength in foundry-logic from customer investments to ramp gate-all-around nodes, partially offset by softer demand in ICAPS nodes. Management noted that DRAM was better than expected, driven by customers investing in advanced DRAM to support AI, while NAND saw a significant increase. Its Applied Global Services (AGS) reported revenue of $1.6 bln, a 1% yr/yr increase, ahead of AMAT's expectations and driven by growth in core services.
• However, reflecting the factors outlined above, AMAT expects Semiconductor Systems revenue to be down 9% yr/yr to $4.7 bln in Q4. AGS is expected to be down 2% yr/yr to $1.6 bln.
• The weak guidance from AMAT has put pressure on others in the semicap space, with peers KLAC Corporation (KLAC -7%), Lam Research (LRCX -7%), and ASML (ASML -1%) all trading lower today, reflecting investor concerns that they may be experiencing similar headwinds.

Despite AMAT's strong Q3 performance, it's clear the company's Q4 guidance is weighing heavily on shares and dragging down the semicap space. What stands out is AMAT's shift in tone regarding demand from leading-edge customers, calling it uneven, with customers being a bit hesitant in their capital commitments. Additionally, the moderation in China spending, its largest revenue geography, is adding to investor caution.