What Are The Trends Weighing On Applied Materials’ Tough Q1 Guidance?

Applied Materials (NYSE:AMAT), the world’s largest semiconductor capital equipment supplier, recently reported its Q4 fiscal 2018 results, which were largely in line with expectations. However, the company’s outlook for the first quarter came in below expectations, amid weakening memory prices and a scale-back of capital spending in both the display and semiconductor segments by major vendors. Applied’s revenues for Q1 FY’19 are projected to come in between $3.56 billion and $3.86 billion, down 12% year-over-year at the mid-point, with its adjusted EPS projected at between $0.75 to $0.83, marking a decline of 25% at the mid-point. Below we take a look at some of the trends that are likely to drive the company’s performance in the near term.

View our interactive dashboard analysis on what to expect from Applied Materials in Q1 FY’19. You can modify any of the key forecasts and drivers to gauge the impact changes would have on the company’s EPS.

Semiconductor Vendors Are More Circumspect About CapEx

There are multiple factors driving a slowdown in the wafer fabrication industry. For one, macroeconomic risks and global trade tensions have increased in recent quarters. For instance, the U.S has moved to block the export of chip production equipment to some memory manufacturing companies in China, amid allegations that they stole intellectual property from U.S-based Micron Technology. Moreover, there has been a pullback in memory-related investments, with demand in the server, PC and mobile space coming in weaker than expected and memory prices seeing some softness. Customers in the foundry space, who generally manufacture chips on a contract basis, are also scaling back on their investments as they look to optimize capacity. For instance, Samsung, one of Applied’s largest customers, indicated that it expects its capital expenditures to drop by 27% to 31.8 trillion Korean won ($28 billion) this year. That said, Applied expects the slowdown to be temporary, noting that its customers expect demand to pick up and memory pricing to stabilize during H2 2019.

Adoption of EUV Technology Could Cause Some Headwinds

Applied also expects to see some headwinds from the semiconductor industry’s adoption of extreme ultraviolet (EUV) technology for chip production in 2019. EUV lithography eliminates the need for multiple deposition/etch processes as well as multiple masks, which are sold by companies such as Applied Materials. While Dutch semiconductor maker ASML is likely to be the biggest beneficiary of this new technology, Applied could potentially stand to lose some market share.

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