Earnings Preview | Apple-Intel Deal Provides a "Godsend," Can Applied Materials (AMAT.US) Q2 Results Support the High Valuation?

Bloomberg News has learned that Applied Materials (AMAT.US) is scheduled to release its second-quarter earnings report on Thursday, May 14. Currently, Wall Street holds a highly optimistic outlook for Applied Materials’ performance growth, generally expecting its earnings per share to fall within the range of $2.66 to $2.68, with revenue potentially reaching $7.83 billion. The company previously provided guidance for the second fiscal quarter with revenue between $7.15 billion and $8.15 billion, and earnings per share between $2.44 and $2.84. As the company is at the top of the supply chain, its earnings guidance not only relates to its own valuation rationality but also directly reveals the capital expenditure intensity of giants like Intel and TSMC in the next-generation chip manufacturing field.

The core focus of this quarter’s earnings report is on the deep transmission of AI hardware dividends from logic chips to advanced packaging fields. As high-performance computing drives explosive demand for high-bandwidth memory (HBM), the manufacturing focus of AI chips has shifted beyond process miniaturization to the complexity of heterogeneous integration.

Market analysis indicates that Applied Materials’ extremely high market share in advanced packaging equipment makes it the biggest beneficiary of this structural growth wave. Investors are closely watching specific data on the order growth rate of packaging business in the earnings report to verify whether the AI wave has indeed transitioned from a single computational power explosion to sustained demand for manufacturing equipment, thereby providing the company with longer-term revenue momentum.

Meanwhile, a technological revolution in the underlying architecture of semiconductors is providing new profit growth points for Applied Materials. As leading foundries like Intel and TSMC advance toward 2nm and below process nodes, traditional transistor architectures are transforming into fully surrounding gate four-terminal (GAA) architectures.

Applied Materials’ management previously revealed that the introduction of GAA technology would significantly increase device sales per wafer by about $1 billion. Therefore, the speed of conversion of GAA-related orders in this quarter’s report will be a key indicator of its profitability certainty over the next two to three years. Coupled with recent rumors of Intel and Apollo Global Management reaching a $11 billion financing deal, Applied Materials’ order backlog in the high-end logic chip market is viewed as having stronger financial backing.

Analysts optimistic about Applied Materials capitalizing on chip expansion dividends

On the eve of the earnings release, senior columnist and macro analyst Jack Bowman of Seeking Alpha systematically reviewed Applied Materials’ investment logic and issued a “Buy” rating—though he admits that the current price is somewhat high for individuals, and prefers to re-enter if the stock price drops after the earnings report.

Bowman positions Applied Materials as the “pick and shovel” seller in the semiconductor field. He points out that Applied Materials’ logic aligns with his long-held view of ASML (ASML.US): not pursuing short-term explosive stock price, but aiming for long-term victory. The key to “pick and shovel” type investments is not about being the fastest starter but about surviving cycles and lasting until the end.

In his view, the biggest highlight for Applied Materials is a catalyst that the market has not fully priced in: Apple (AAPL.US) and Intel (INTC.US) reaching an agreement to produce iPhone chips domestically in the U.S. Transforming existing wafer fabs or building new production lines will require a large amount of new equipment, which is Applied Materials’ main business.

More critically, Intel’s existing wafer fabs do not produce mobile chips, meaning this will be a new incremental demand rather than a replacement of existing capacity. Bowman specifically mentions that this wave of growth has a clear political dimension, with the fact that the government directly holds shares in Intel also playing a role in boosting confidence.

In addition to the Apple-Intel deal, Bowman believes Applied Materials will also benefit from broader structural trends. Its equipment covers the entire chip market—robots, autonomous vehicles, DRAM, high-bandwidth memory (HBM), and other storage components, almost everywhere. Global memory manufacturers and packaging companies are in a frantic expansion phase, with supply shortages and demand surges being a comprehensive positive for Applied Materials.

However, Bowman’s most focused core indicator for the earnings report is not revenue but profit margins. He explicitly states that Applied Materials’ operating profit margin has been relatively stagnant over the past year, but with the booming memory business, this situation is changing. If Q2 operating profit margin can rebound to above 34%, he will directly upgrade his rating to “Strong Buy.”

Applied Materials’ “Valuation Play”

The market currently expects Q2 revenue of $7.83 billion, higher than the company’s own guidance median of $7.65 billion; earnings per share are expected at $2.71, also above the previous guidance of $2.68. Bowman’s analysis suggests that analysts have set a very high bar here—if Applied Materials performs according to its own targets, it may be difficult to meet analyst expectations, potentially disappointing the market. But he also points out that recent events such as memory shortages, ongoing construction of new and old wafer fabs, and the AI boom make him believe that the market’s over-optimistic pricing is justified.

Financially, Bowman highly praises Applied Materials’ resilience. He cites data: over the past decade, the company has invested $25 billion in R&D and $8 billion in capital expenditures, distributing 90% of excess free cash flow to shareholders, with a compound annual dividend growth rate of 16%. Cash and cash equivalents exceed long-term debt, and its balance sheet is sufficient to support potential acquisitions. In his view, in an era where everyone is shouting “bubble,” Applied Materials possesses financial buffers that many other semiconductor companies lack—meaning it does not have the dazzling growth signals, but even if the bubble bursts, it could maintain growth over the long term.

However, Bowman also issues a clear risk warning. Applied Materials’ forward P/E ratio is close to 40, far above its three-year average of 22. He calls this the biggest danger signal before the earnings report—“Buying based on a 40x P/E ratio justified by the earnings report is very different from buying based on a 22x P/E ratio.”

Ultimately, Bowman gives Applied Materials a “Buy” rating but adopts a conservative strategy: personally, he believes the current price is too high and has added Applied Materials to his watchlist, waiting for a post-earnings decline to re-enter; but for long-term investors, he suggests that if they are willing to endure short-term performance volatility, they could even buy before the earnings call. “Any semiconductor investor who intends to add pick and shovel exposure to their portfolio should definitely consider Applied Materials,” he writes.