15 May 2020

Applied Materials Seems Well Equipped, Despite Q2 Miss

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What’s happening: Shares of Applied Materials climbed in extended trading on Thursday despite the semiconductor equipment maker reporting weaker-than-expected results for its fiscal second quarter.

What happened: The COVID-19 outbreak has affected the manufacturing operations of the Santa Clara, California-based company, while also leading to a decline in the demand for its chips.

The chip maker missed market expectations for its fiscal second quarter and withdrew its outlook for the next quarter, citing supply chain disruptions due to the coronavirus pandemic. Despite all these negative announcements, the stock managed to post strong gains in the regular session and then again in after-hours trading on Thursday.

How were the results: Applied Materials delivered growth in revenue and profit, but both figures still fell short of market estimates.

  • Revenue surged 12% to $3.96 billion in the quarter but missed expectations of $4.09 billion.
  • Net income surged to $755 million, or 82 cents per share, from $666 million, or 70 cents per share in the same quarter last year. However, this was below the consensus estimate of 93 cents a share.

Why it matters: The global slowdown in smartphone shipments led to a decline in demand for the company’s chips. Despite this and the pandemic affecting its manufacturing operations, Applied Materials was able to generate double-digit growth in both revenue and earnings. The company’s gross margin expanded to 44.6%, from 43.5% in the same quarter last year.

The company’s stock, as well as those of its peers, recorded strong gains on Thursday on reports of Taiwan’s largest semiconductor firm planning to invest in a chip plant in Arizona. Taiwan Semiconductor Manufacturing Company plans to build a $12 billion chip facility in the US state, which will also create more jobs for the country.

Applied Materials did not issue any detailed forecast for the current quarter, contrary to its usual practice. Management was upbeat, however, about the near-term outlook due to strong demand from logic and foundry customers.

“As we navigate the challenges created by Covid-19, we have rallied the company around safety, productivity and keeping our customers and the industry moving forward,” Applied Materials CEO Gary Dickerson said. He added, “While the situation remains fluid, based on the visibility we have today, our supply chain is recovering, and underlying demand for our semiconductor equipment and services remains robust.”

How the shares responded: Applied Materials spiked 5.7% in the regular session on Thursday. The stock initially slipped in extended trading following the release of quarterly results but recovered and climbed by 4.7%. The company’s shares have gained around 4% over the past month.

What to watch: Given the CEO’s bullish comments about the company’s near-term prospects, investors will expect Applied Materials to generate healthy results in the upcoming quarters. The markets hope for a quick recovery of the company’s supply chain.

The Markets Today

     

European stocks will be in focus today, ahead of various economic reports scheduled to be released later in the day.

Context: European stocks closed sharply lower on Thursday, recording a decline for the second consecutive day, as investors focused on the warning released by US Federal Reserve chief Jerome Powell.

Details: Fed Chairman Powell issued a warning on Wednesday of the US economy spiraling into a deep recession, while saying that policymakers may be forced to use additional fiscal measures to combat the extreme damage caused by the coronavirus pandemic.

Weak economic numbers also weighed on overall market sentiment. Germany’s consumer price inflation slipped to 0.9% in April, from 1.4% in March. Switzerland reported a 4% decline in producer and import prices for April. The only ray of hope was a decline in the French unemployment rate, which fell to 7.8% in the first quarter, from 8.1% in the previous quarter.

The US Labor Department on Thursday reported higher-than-expected initial jobless claims numbers. Around 2.98 million people filed for unemployment benefits during the week ending May 9, higher than expectations of 2.7 million.

The pan-European Stoxx 600 index tumbled 2.2% in yesterday’s session, with all sectors closing in negative territory. Auto stocks were the hardest hit, declining 2.9%.

The German DAX 30 lost 1.95%, French CAC 40 fell 1.65% and FTSE 100 closed lower by 2.75% on Thursday.

Shares of Countryside Properties nosedived 17% after the British company reported a 38% decline in its adjusted operating profit for the first half.

What to watch: Investors will be keeping an eye on coronavirus numbers, with various economies easing lockdown restrictions. The number of positive COVID-19 cases in the UK has surpassed 234,440 with around 33,690 deaths, while Spain has confirmed over 229,540 COVID-19 cases.

Markets await a basket of economic reports the Eurozone, including GDP growth, balance of trade and employment figures. The Eurozone GDP is expected to contract by 3.8% in the first quarter. The number of people employed, which rose 0.3% in the fourth quarter, is expected to decline 0.4% in the first quarter.

Other Markets: US indices closed higher on Thursday, with the Dow, S&P 500 and Nasdaq 100 up by 1.62%, 1.15% and 0.91%, respectively.

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What else to watch today

     

Germany’s producer prices and GDP growth rate, France’s inflation rate, Italy’s inflation rate, industrial new orders and sales, India’s foreign exchange reserves and balance of trade, Brazil’s IBC-Br economic activity index, Canada’s foreign stock investment, Russia’s balance of trade as well as the US retail sales, NY Empire state manufacturing index, industrial production, business inventories, job openings, University of Michigan's consumer sentiment index and Baker Hughes crude oil rigs.

 

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