Applied Materials spurs chip rally as analysts praise view despite 'current challenges'
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Following Applied Materials (NASDAQ:AMAT) strong fourth-quarter results and guidance, several Wall Street analysts heaped praise on the company, leading to a rally in chip stocks.
Morgan Stanley analyst Joseph Moore, who has an equal-weight rating on Applied Materials (AMAT), noted the results were "likely a function of exposure to foundry capacity additions which remain healthy," but added that there could be some cracks starting to show soon.
"Applied was overall more positive around their business than some peers, but we see this as more of a difference in timing rather than impact of the coming [wafer fab equipment] slowdown," Moore wrote in a note to clients, referencing comments made by Lam Research (NASDAQ:LRCX) and KLA Corp (NASDAQ:KLAC), both of which said spending on wafer fab equipment would be down 20% next year.
Moore, who tweaked his price target on Applied Materials (AMAT) to $88, following the results, pointed out that the company said it is still seeing "generally strong trends," but added it is still playing catch-up with orders and challenges may start to come in the April quarter "and continue throughout next year." 
In the first quarter of fiscal 2023, Applied (AMAT) said it expects revenue to be between $6.3B and $7.1B, including the impact of the recently announced U.S. export regulations. Analysts were expecting $6.41B in revenue. Adjusted earnings are forecast to be between $1.75 and $2.11 per share, compared to estimates of $1.81 per share. 
Wells Fargo analyst Joe Quatrochi noted that the results were "better than feared,"and wile the company has continued to see "significant pushouts and reductions for 2023 memory demand," orders were still strong and its $12.7B backlog is nearly twice the $6.7B it was a year ago.
"We reiterate our [overweight] rating on [Applied Materials] as we believe leading edge foundry / logic demand, improving supply chain execution, and prudent [operating expenes] management can drive model resiliency," Quatrochi wrote in a note to clients. 
Regarding the China restrictions, which Applied Materials (AMAT) quantified as being a $1.5B to $2.5B impact, Evercore ISI analyst C.J. Muse noted the impact is likely somewhere in the middle.
"We believe the delta between the two is where customer sites are right on the tech threshold (i.e. we do think Applied is expecting to obtain licenses for Yangtze Memory Technologies, ChangXin Memory Technologies, or Semiconductor Manufacturing International Corporation's 16nm fab) â and here is where the company is hopeful to obtain licenses," Muse wrote in a note to clients. 
Applied Materials (AMAT) rose 3.6% to $108.24 in premarket trading on back of the results, leading to gains in other chip stocks, including competitors Lam Research (LRCX) and KLA Corp. (KLAC).
Other semiconductor stocks rose in premarket trading, including Advanced Micro Devices (AMD), Nvidia (NVDA), Intel (INTC) and Qualcomm (QCOM), all of which saw gains of 1% or more.
Last week, Bank of America said the bull case for semiconductors had started to become "compelling," mentioning Applied Materials (AMAT), among several others.