Applied Materials tanks after ugly guidance

Applied Materials, the largest stock in the S&P 500 semiconductor equipment industry group, is down double digits after issuing fourth-quarter guidance that soundly disappointed investors.

For the three months ending October 31, management said net sales would come in between $6.2 billion and $7.2 billion, with adjusted diluted earnings per share from $1.91 to $2.31. Analysts had been looking for $7.32 billion on revenues and $2.38 for EPS, so the midpoint of those ranges are big misses.

Peers Lam Research and KLA Corp are also selling off in the wake of this news.

That gloomy outlook came in Applied Materials’ Q3 earnings report (that is, the three months ending July 27), where the results were solid: both revenues and adjusted diluted EPS were above expectations and hit records.

But “little went as planned” with the guidance, per Morgan Stanley analysts led by Shane Brett. While management attributed its less-than-stellar outlook to uncertainties surrounding its China business, Morgan Stanley says it’s a function of softness in its foundry logic business and the likelihood that its memory chip business “won’t quite reach a record year.”

The analysts conclude, “Two issues stand out: 1) The magnitude of the company’s reported quarterly beats has narrowed since AprQ 2024, as the company has set guides that leave little room for error, and 2) earnings call commentary has raised expectations to a level where there is no margin for error.”

On the conference call, CFO Brice Hill also offered detail on one near-term spot of bother for the company, saying, “We expected nearly $5 billion of gate-all-around [GAA] related purchases in 2025, and now we’re seeing that be lower, probably just over $4.5 billion.”

Charles Shi, an analyst at Needham, thinks that means the company has an Intel problem.

“Management refuses to call out specific GAA customers (because there are only four), but given the fact that leading-edge logic weakness was so far only called out by ASML (not covered), Tokyo Electron (8035-JP, not covered), and AMAT, and was not even mentioned by LRCX and KLAC, we suspect the shortfall is largely INTC driven, as among the top five WFE [wafer fab equipment] names, ASML, Tokyo Electron, and AMAT are the ones over-indexed to INTC,” he wrote.