Is Cost Of Sales The Key Driver Of Applied Materials’ Expenses And Overall Profitability?

Applied Materials’ (NASDAQ: AMAT) total expenses have risen over the past 2 years, going from $11.18 billion in 2017 to $11.9 billion in 2019. As a percentage of total revenues, expenses rose, going from 76.1% in 2017 to 81.5% in 2019, both due to a rise in total expenses, and a drop in revenue.
Cost of sales is the biggest expense head for the company, with it being 55% of revenue in 2017, before rising to around 56.28% of revenue in 2019. Along with this, a rise in operating expenses and income taxes, has led to a drop in earnings per share from $3.28 in 2017 to $2.89 in 2019. However, with an expected rise in revenue in 2020, cost of sales and SG&A, both as % of revenue, are expected to drop slightly, leading to a projected increase in net income margin from 18.5% in 2019 to 18.9% in 2020.
Further, by 2021, net income margin is set to be around 19.5%, and this projected growth has helped drive a ~55% rise in Applied Materials’ share price over the past year.

In our interactive dashboard How Does Applied Materials Spend Its Money?, we take a look at the key drivers of Applied Materials’ expenses and net margins.

Applied Materials’ Net Income Margins dropped from 23.9% in 2017 to 18.2% in 2018, before rising slightly to around 18.5% in 2019. Going forward, margins are expected to rise steadily, to 18.9% in 2020 and then 19.5% in 2021.

You can read more about the factors driving Applied Materials’ growth in our interactive dashboard- Applied Materials: Why did the stock grow 3x in 4 years?

Breakdown of Applied Materials’ Total Expenses

• Cost of Goods Sold has risen from $8.09 billion in 2017 to $8.22 billion in 2019, despite a drop in revenue. This has largely been due to a drop in selling prices, owing to the semiconductor supply glut. As a % of Revenue, Cost of Goods Sold has risen from 55% to 56.3% over the same period. However, with the semiconductor market gradually returning to a state of balance, this metric is expected to be 55.9% in 2020 and 56% in 2021.
  
• R&D Expense has risen over the past 2 years, going from $1.78 billion in 2017 to $2.05 billion in 2019. As a % of revenue, R&D expense rose from 12.1% to 14.1% over the same period. Going forward, we expect this metric to rise to 14.7% in 2020, before dropping to 13.8% in 2021.
• SG & A Expense grew slightly from $900 million in 2017 to about $980 million in 2019, despite a drop in total revenue. As a % of revenue, this expense went from 6.1% to 6.7% over the same period. This has largely been due to a drop in selling prices for the company’s products. Going forward, we expect this metric to come in at 6% in 2020 and 6.1% in 2021.
• Net Interest Expense dropped from $120 million in 2017 to $81 million in 2019. There was a drop in 2018 and 2019, as Applied Materials’ interest income grew, and total debt remained roughly the same, going from $5.3 billion in 2017 to $5.31 billion in 2019. Going forward, we expect net interest expense to come in at $92 million in 2020 and 2021.
• Income Tax Expense first increased from $300 million in 2017 to $1.36 billion in 2018, on the back of a one-time tax expense, before dropping back to $560 million in 2019. Going forward, the effective tax rate is expected to be around 17.5% in the near term.

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