Applied Materials (AMAT) reported another quarter of strong earnings and sales growth late Thursday. But with the stock still below its 50-day moving average, is AMAT stock a buy now?
Applied Materials reversed lower Friday morning despite another earnings and sales beat. Adjusted profit jumped 79% to $1.90 a share, with revenue up 41% to nearly $6.2 billion. The Zacks consensus estimate was for profit of $1.76 a share, with revenue up 35% to $5.92 billion.
“Applied Materials delivered record performance as long-term trends fueled by the digital transformation of the economy drive strong, secular demand for semiconductors,” said Gary Dickerson, President and CEO. “We have the broadest and most enabling portfolio of technologies to accelerate our customers’ roadmaps, putting us in a great position to outperform our markets again in 2021 and the years ahead.”
AMAT Stock: Bullish Guidance
Applied Materials also guided Q4 results above expectations. For the current quarter, Applied Materials forecast adjusted earnings of $1.94 a share on sales of $6.33 billion. That’s based on the midpoint of its outlook. Wall Street had predicted earnings of $1.81 a share on sales of $6.04 billion in the fiscal fourth quarter.
Chip-equipment stocks like AMAT and Lam Research (LRCX) fell hard on Aug. 10 after Taiwanese market researcher TrendForce said contract prices of memory chips built into personal computers could decline by as much as 5% quarter over quarter in Q4.
Strong Q2 Growth
The latest results followed a bullish quarter of growth in May. After three straight quarters of 20%+ revenue growth, growth accelerated in Q2, up 41% to $5.6 billion Adjusted earnings jumped 83% to a $1.63 a share. The results easily topped the Zacks consensus estimate of $1.51 a share and revenue of $5.39 billion.
Fiscal 2021 earnings are expected to rise 58% from 2020, with growth decelerating in 2022, up 12%. Estimates have been heading higher.
Last year, Dickerson said the chip industry is moving away from an era when smartphones drove the majority of semiconductor investments. He said that declines in memory chip spending should be offset by increased spending in artificial intelligence, big data and cloud infrastructure. Continued strength in Internet of Things (IoT) and automotive technology markets should also help.
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In its latest fiscal year, Applied Material delivered strong annual return on equity of 41%.
Applied Materials’ Composite Rating of 93 ranks it No. 7 in IBD’s chip-equipment group, according to IBD Stock Checkup. Leadership is broad in the group as several top chip-equipment stocks have turned into stock market leaders. Other top-rated stocks include Kulicke & Sofa (KLIC), Entegris (ENTG) and Leaderboard stock ASML (ASML).
With the Stock Checkup, it’s easy to quickly identify the fundamental and technical leaders in a group.
AMAT Stock: Buy Or Sell?
Last year, AMAT stock soared out of a first-stage, 11-week consolidation in early November. The breakout was helped by a bullish follow-through day for the S&P 500 on Nov. 4. The S&P 500’s 2.2% gain in higher volume put the stock market in a confirmed uptrend, giving the green light for new buys. The Nasdaq composite followed through one day later, rising 2.6% in higher volume.
Buying demand has dried up in AMAT stock as the stock consolidates below its 10-week moving average in a 20-week consolidation. Sellers have the upper hand for now, which means AMAT stock is not a buy now.
How To Spot Market Tops
Applied Materials’ relative strength line has been trending lower for some time now, another reason to be cautious. A stock’s relative strength line, found in IBD daily and weekly charts, compares a stock’s price performance against the S&P 500. If the stock is outperforming the S&P 500, the RS line will be trending nicely higher. And vice versa.
Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight.
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