In the third quarter revenue decreased by 1% to USD 6.43bn, continuing the negative trend of the previous two quarters by turning negative. Still, this was at the upper end of the Q3 guidance range that was published after the second quarter and over 4% above consensus estimates. While the gross margin slightly improved, the operating margin dropped by 1.5 percentage points to 28.0% in Q3-22 yoy. As a result, operating income fell by 7.1% to USD 1.82bn in Q3. In contrast, net income only went down by 3% to USD 1.56bn, whereas adjusted net income came down by 5% to USD 1.60bn. On the other hand, reported EPS was flat at USD 1.85 and adjusted EPS fell by 2% to USD 1.90. EPS was also rather at the upper end of the outlook and nearly 10% above expectations.

Segment-wise Semiconductor Systems saw negative business development, as revenue went down by 1.2% to USD 4.68bn, as a sharp increase in foundry, logic and other - its revenue share went up from 66% to 79% - could not make up for the rest of the segment. Memory still suffers from lower demand, as revenue nearly fell by 40%. Operating income was also down, and more substantially as margin dropped from 35.9% to 34.6%, resulting in operating income of USD 1.63bn (-4.9% yoy). Applied Global Services saw a small increase in revenue with 3.1% to USD 1.46bn. As margins fell in this segment as well, operating income actually went down by 1.1% to USD 429m.  Lastly, Display and Adjacent Markets saw a significantly worse market environment, as demand for electronic products like smartphones or TVs continues to be subdued. Thus, revenue was down by 29.4% to USD 235m and as volumes declined significantly margins went from 20.7% to just 15.7%, resulting in operating income of USD 37m, 46.4% less than in the same period a year prior. Despite the negative development, an improvement versus the growth rate and margin in the previous quarter. While all three segments delivered above-expectation net sales, but the Display & Adjacent Markets surprised the most by beating expectations by around 38%. 

The new Q4 outlook is way above consensus estimates as projections of USD 1.61 are even below the lower end of the guidance of USD 1.82. However, memory continues to be a headache.

Valuation: Applied Materials currently trades at 19.2x P/E 24E, above its 5-year historical average of 14.2x and below the MSCI USA Semiconductors & Semiconductor Equipment Index (23.3x). On a 2024E EV/EBITDA basis, the stock is trading at 17.0x, above its 5-year average of 11.9x and in line with the MSCI USA Semiconductors & Semiconductor Equipment Index (17.0x). On a P/S 24E basis, the stock is trading at 4.7x, above its 5-year average of 3.5x and below the MSCI USA Semiconductors & Semiconductor Equipment Index (6.9x).                                                                                                                 

We confirm our buy recommendation. 

Management Outlook

Q4 2023: Net sales of USD 6.51bn plus/minus USD 400m. Non-GAAP adjusted EPS of USD 1.82 to USD 2.18.