Applied Materials reported strong financial performance for Q2 2024, with earnings per shareEarnings per share (EPS) is a fundamental financial metric that provides valuable insights into a company's profitability. This widely used indicator helps investors and analysts g... More (EPS) of $2.09, exceeding the expected $1.84, and revenue of $6.65 billion, surpassing the estimated $6.04 billion. Key highlights include robust segment performances, particularly in Semiconductor Systems and Applied Global Services (AGS), and significant shareholder returns through dividends and share buybacks. The company’s leadership in semiconductor process technology is pivotal in driving transformative trends like AI, IoT, and clean energy. Applied Materials is strategically positioned for sustained growth through innovation, collaboration, and efficient capital allocation.

Q2 2024 Financial Highlights

Revenue and Earnings Performance

Applied Materials reported strong Q2 2024 results, with revenue and earnings at the higher end of their guided range. The company achieved a revenue of $6.65 billion, up slightly year-over-year, and a non-GAAP EPS of $2.09. This performance reflects Applied Materials’ ability to capitalize on the growing demand for semiconductors, driven by major technology trends reshaping the global economy.

Segment Performance

• Semiconductor Systems: Revenue remained strong at $4.9 billion, with record ion implant sales. The segment’s non-GAAP operating marginThe operating margin is a critical financial metric that measures a company's ability to generate profit through its core operations. It provides valuable insights into a company's... More was 34.9%.
• Applied Global Services (AGS): Revenue increased by 7% year-over-year to $1.53 billion, with a non-GAAP operating margin of 28.5%. AGS continues to benefit from long-term service agreements, contributing significantly to recurring revenue.
• Display: Q2 revenue was $179 million, with a non-GAAP operating margin of 2.8%. The segment is poised for growth as OLED technology adoption expands to larger screen sizes in notebook PCs and tablets.

Cash Flow and Shareholder Returns

Applied Materials generated nearly $1.4 billion in operating cash flowThe cash flow statement provides a detailed overview of the cash inflows and outflows of a company over a specified period of time. It includes cash received from operations, inves... More and $1.14 billion in free cash flow during Q2. The company distributed almost $1.1 billion to shareholders, including $266 million in dividends and $820 million in share buybacks, repurchasing 4.1 million shares at an average price of $197.77.

Strategic Insights and Technological Leadership

The Role of Semiconductors in Technology Trends

Semiconductors are the backbone of several transformative technology trends, including artificial intelligence (AI), the Internet of Things (IoT), automation, electric and autonomous vehicles, and clean energy. These trends are driving demand for more advanced chips with higher performance and improved energy efficiency. Applied Materials’ innovations are critical in enabling these technological inflections, positioning the company for sustained growth.

AI and Advanced Chip Technologies

AI is expected to be the most significant technology inflection of our lifetimes, with advanced chips at its core. Applied Materials leads in the process technologies required for AI data centers, including leading-edge logic, high-performance DRAM, DRAM stacking technology (HBM), and advanced packaging. The company has made significant investments in next-generation solutions to support these key device architecture inflections.

Collaboration and Innovation

The complexity of implementing new semiconductor technologies necessitates earlier, deeper, and broader collaboration with customers. Applied Materials’ global epic platform is designed to support high-velocity innovation and commercialization of next-generation technologies. This collaborative approach is driving double-digit growth in the company’s service business, with AGS delivering record revenue of $1.5 billion this quarter.

Advanced Logic and DRAM

In advanced logic, Applied Materials holds a leadership position in materials engineering processes for transistors and interconnects. The transition to gate-all-around (GAA) transistors, which is now moving into high-volume manufacturing, is significantly expanding the company’s available market. For every 100,000 wafer starts per month of capacity, the GAA transition increases Applied Materials’ market for the transistor module from around $6 billion to approximately $7 billion.

In the DRAM segment, Applied Materials’ deep capabilities in logic, DRAM patterning, and capacitor scaling position the company as the leader in process equipment. The company expects to generate more than $2.5 billion in revenue from GAA nodes this year, with potential to more than double that in 2025.

High Bandwidth Memory and Advanced Packaging

Applied Materials has strong leadership in the critical die stacking technologies used in high-bandwidth memory (HBM). The company expects HBM packaging revenue to be six times higher in 2024 than in 2023, reaching over $600 million. The advanced packaging product portfolio is projected to grow to approximately $1.7 billion this year, with opportunities for further expansion as heterogeneous integration becomes more widely adopted.

Capital Allocation and Future Growth

Efficient Business Model

Applied Materials’ efficient business model generates healthy free cash flow, which is reinvested in R&D and capital infrastructure to drive profitable growth. The company has reinvested over $20 billion in R&D and more than $5 billion in capital additions over the past decade, while distributing more than 90% of free cash flow to shareholders.

Dividend and Share Buyback Program

Applied Materials continues to prioritize shareholder returns through its dividend and share buyback program. In March 2023, the company announced a 23% increase in its dividend per share, followed by a 25% increase in March 2024. The capital allocation strategy supports the company’s operating model, which has delivered consistent growth in revenue, EPS, free cash flow, and dividends per share.

Q3 2024 Guidance

For Q3 2024, Applied Materials expects revenue of $6.65 billion, plus or minus $400 million, and non-GAAP EPS of $2.01, plus or minus $0.18. The outlook includes semiconductor systems revenue of around $4.8 billion, AGS revenue of about $1.57 billion, and display revenue of approximately $245 million. The company anticipates a non-GAAP gross marginGross margin is a critical financial metric that plays a pivotal role in evaluating a company's financial health and profitability. It is a percentage that indicates how efficientl... More of approximately 47% and non-GAAP operating expenses of around $1.26 billion, with a modeled tax rate of 12.3%.

Insights

1. EPS exceeded expectations by $0.25, signaling strong profitability.
2. Revenue growth driven by Semiconductor Systems and AGS.
3. Strategic focus on AI and advanced chip technologies ensures future relevance.
4. Significant shareholder returns reflect a commitment to value creation.

The Essence (80/20)

• Core Topics:
  • Financial Performance: Surpassing market expectations with $6.65 billion in revenue and $2.09 EPS.
  • Segment Success: Strong performance in Semiconductor Systems and AGS, with notable growth in service agreements.
  • Technological Leadership: Innovations in AI, advanced chips, and semiconductor technologies.
  • Capital Allocation: Efficient use of free cash flow for R&D, infrastructure, and shareholder returns.
• Detailed Descriptions:
  • Financial Performance: Reflects robust demand for semiconductors, with key metrics outperforming estimates.
  • Segment Success: Semiconductor Systems revenue at $4.9 billion, AGS at $1.53 billion, highlighting the impact of technology trends.
  • Technological Leadership: Focus on AI data centers, high-performance DRAM, and advanced packaging technologies.
  • Capital Allocation: Emphasizes reinvestment in growth and substantial returns to shareholders through dividends and buybacks.

The Action Plan

1. Expand AI and Semiconductor R&D: Invest in cutting-edge technologies to maintain leadership.
2. Enhance Customer Collaboration: Deepen partnerships to accelerate innovation and commercialization.
3. Optimize Shareholder Returns: Continue strategic buybacks and dividend increases to boost shareholder value.
4. Monitor Emerging Trends: Stay ahead of market shifts in AI, IoT, and clean energy for new growth opportunities.

Blind Spot

• Potential Supply Chain Disruptions: Applied Materials must proactively manage supply chain risks to ensure uninterrupted production and delivery of advanced semiconductor technologies.

Applied Materials (AMAT) Technical Analysis

Price Movement and Moving Averages:
The stock is trading above both the 50-day and 200-day moving averages, indicating an overall uptrend. The 50-day moving average is significantly higher than the 200-day, which suggests strong upward momentum.

Volume:
Volume: 7,977,800 shares
The volume shows a spike, suggesting increased trading activity which could indicate either strong buying or selling pressure.

Relative Strength IndexIn the world of technical analysis, the Relative Strength Index (RSI) stands as a cornerstone tool for traders seeking insights into market momentum. Developed by J. Welles Wilder ... More (RSI):
RSI Value: 59.34
The RSI is in the neutral zone. A value between 30 and 70 typically indicates that the stock is neither overbought nor oversold.

On-Balance VolumeThe On Balance Volume indicator (OBV) is a technical analysis tool used to measure the flow of money into and out of a security over a specified period of time. It is a cumulative ... More (OBV):
OBV Value: 29,277,300
The OBV is trending upwards, which generally supports a bullish outlook as it indicates that volume on up days is outpacing volume on down days.

Stochastic RSIIn the realm of technical analysis, the Stochastic RSI (StochRSI) emerges as a powerful tool for traders seeking to navigate market dynamics with precision. Developed by Tushar S. ... More:
Stochastic RSI Value: 0.844
The Stochastic RSI is in the higher range, nearing the overbought threshold of 0.8. This suggests potential overbought conditions and could signal a possible pullback.

Average Directional IndexThe Average Directional Index (ADX) stands as a cornerstone indicator in the toolkit of technical traders, offering insights into the strength of market trends. Developed by Welles... More (ADX):
ADX Value: 17.17
The ADX is below 20, indicating that the current trend (upward) might be weak or not strongly defined.

Chaikin OscillatorNamed after its creator Marc Chaikin, the Chaikin Oscillator stands as a formidable tool in the arsenal of technical analysts. This oscillator is designed to measure the accumulati... More:
Chaikin Oscillator Value: 709,262
The Chaikin Oscillator is above zero, which generally supports a bullish outlook, indicating accumulation or buying pressure.

Applied Materials (AMAT) shows strong bullish signals overall, with the price above key moving averages and supportive volume indicators. However, the weak ADX and high Stochastic RSI suggest caution as the trend may not be very strong and the stock could be nearing an overbought condition.

Final Thoughts

Applied Materials’ strong Q2 2024 performance underscores the company’s leadership in semiconductor process technology and its strategic positioning to benefit from long-term growth trends. As major technology inflections like AI, IoT, and clean energy continue to reshape the global economy, Applied Materials is well-equipped to capitalize on the increasing demand for advanced chips. Through innovation, collaboration, and efficient capital allocation, the company is poised for sustained growth and value creation for shareholders.

Applied Materials Q2 2024 Earnings Report: FAQ

Book Recommendations

1. “Chip War: The Fight for the World’s Most Critical Technology” by Chris Miller: Explores the geopolitical importance of semiconductors and the industry’s future.
2. “The Innovators: How a Group of Hackers, Geniuses, and Geeks Created the Digital Revolution” by Walter Isaacson: Chronicles the history of the digital revolution, highlighting key innovations in semiconductor technology.
3. “Artificial Intelligence: A Guide for Thinking Humans” by Melanie Mitchell: Provides an accessible overview of AI technologies and their implications for the semiconductor industry.