Applied Materials, a prominent manufacturer of semiconductor-manufacturing equipment, may experience a substantial letdown alongside other chip-related stocks in the upcoming year, as suggested by Susquehanna’s analysis.
Neutral Rating for Applied Materials Shares
Analyst Mehdi Hosseini recently reiterated a Neutral rating for Applied Materials shares (ticker: AMAT) and reaffirmed a price target of $128. Despite this, the shares dropped by 1.2% to $148.85 on Monday.
Diminishing Demand for Less Advanced Chips
Susquehanna anticipates rapidly declining demand for less advanced chips, leaving no room for minimizing the impact of worsening market conditions. In their note, they state, “We believe there is a significant risk to the current FY24 consensus that has not yet been factored in.”
Inventory Overabundance Impeding Chip Manufacturing Investments
The analyst predicts that bloated inventories of chips in the analog semiconductor market will result in reduced investments in chip manufacturing come 2024. This decline in investment is expected to adversely affect the demand for Applied’s products, even if sales of higher-end chips, particularly those used for artificial intelligence, remain strong.
Applied Materials’ Response
As of now, Applied Materials has not provided any response or comment on these observations.
Lower Earnings Forecasted for Fiscal 2024
In light of the potential budget reductions, Hosseini estimates that Applied Materials will report earnings per share of $5.87 for fiscal 2024. This projection is more than 20% lower than the Wall Street consensus estimate of $7.76.
Semiconductor Industry Faces Challenges Ahead
The semiconductor industry is currently grappling with challenging conditions, particularly in the auto and industrial markets. Leading chip makers like ON Semiconductor (ON) and Lattice Semiconductor (LSCC) have reported weak results and have expressed concerns that this weakness may persist for several quarters.
Adding to this trend, Tower Semiconductor (TSEM) recently provided a revenue forecast for the current quarter that fell short of analysts’ expectations. Tower Semiconductor specializes in manufacturing analog chips for the consumer, industrial, and auto markets.
According to industry analyst, Amir Hosseini, the inventory correction for semiconductor companies, especially those using trailing edge logic/foundry technology outside of China, is expected to continue well into the first half of 2024.
Despite these challenges, Applied Materials, a key player in the semiconductor industry, has experienced a noteworthy rally in its shares over the past year. With a rise of approximately 35%, Applied Materials has outperformed the iShares Semiconductor exchange-traded fund, which tracks the performance of the ICE Semiconductor Index and has seen a 29% increase within the same period.
Investors and industry observers eagerly await Applied Materials’ fiscal fourth-quarter results which are set to be released on Thursday.