What Happened?

Shares of semiconductor machinery manufacturer Applied Materials (NASDAQ:AMAT) fell 6.8% in the afternoon session after the company reported mixed fourth quarter results: Its revenue guidance for next quarter slightly missed and its inventory levels slightly increased. The company also acknowledged "export control-related headwinds" during its earnings release, highlighting the significance of the recent trade war and tariffs on its business and likely raising further concern among cautious investors. 

On the other hand, Applied Materials beat analysts' EPS expectations and its adjusted operating income outperformed Wall Street's estimates. Overall, this was a softer quarter.

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What The Market Is Telling Us

Applied Materials’s shares are quite volatile and have had 19 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business. 

The biggest move we wrote about over the last year was 12 months ago when the stock gained 13% on the news that the company reported strong fourth-quarter results that exceeded analysts' revenue and EPS expectations, which is especially impressive given how many semis companies missed and talked about macro headwinds this earnings season. Free cash flow also improved significantly from the previous quarter. Revenue guidance for the next quarter also came in ahead of consensus. 

Management highlighted some of the drivers of the strong outlook. Firstly, the AGS (applied global services) segment, which grew 8% during the quarter and stands at a $6 billion annual run rate, has the potential to achieve double-digit growth in the coming quarters. Also, the DRAM business continued to contribute strongly to the semiconductor systems segment as the company continued to gain market share. 

Underpinning the company's growth thesis for the coming quarters are three broad assumptions. 1.) A semiconductor market growing faster than GDP 2.) An equipment market growing even faster than the semiconductor market 3.) AMAT's equipment business outgrowing the market.

Applied Materials is up 5.4% since the beginning of the year, but at $172.76 per share, it is still trading 32.2% below its 52-week high of $254.97 from July 2024. Investors who bought $1,000 worth of Applied Materials’s shares 5 years ago would now be looking at an investment worth $2,584.

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