Semiconductor and solar cell manufacturing supplier Applied Materials (NASDAQ: AMAT) faces strong headwinds in the face of deteriorating global growth. In particular, they are worried that consumers are pulling back on buying electronics such as computers, flat panel displays, tablets and smartphones. The company’s core customers including Intel (NASDAQ: INTC) and Samsung are currently delaying and canceling orders in response to this uncertainty.
Applied Materials now expects revenue in the first quarter to fall by 5% to 15% from the previous year to between $1.85 and $2.07 billion according to their most recent earnings announcement. Earnings should also follow the downward path of revenue. According to Zack’s Equity Research, net income for 2012 is now expected to only be $0.84 cents per share vs. an earlier expected $1.00 per share.
Volatile Market for the Risk Happy
With such a disappointing outlook, Applied Materials stock has fallen by about 35% from the highs of the year, even after the recent run-up in price. The company has struggled to overcome the deterioration in the silicon wafer and fabrication equipment market which contributes approximately 43% of the company’s stock price.
The market is extremely volatile and difficult to navigate. In 2009 the market crashed to $16 billion before recovering to $43 billion this year. We project a drop down to $35 billion next year before a slow and steady recovery for the remainder of the forecast period.
The massive change in the market size demonstrates the great risk in this stock. Only investors with a strong appetite for risk taking should enter this market segment. With recession in Europe and a slow-down in the U.S. and China looking increasingly likely next year, the market has further downside risk. However the global economy performs, the result will be amplified in the silicon fabrication market which may swing wildly.