Applied Materials (AMAT) shares were trading around $12 in August and September, but the stock has been trending lower, in spite of the fact that the overall market has been generally heading higher. This underperformance could be poised to continue, and the stock could be poised to drop to $10 per share (if not lower) in the coming weeks.
Applied Materials is a leading maker of equipment that is used to manufacture semiconductors, solar wafers and other related products. Many major semiconductor and solar makers use the company's products, and that could be a problem in the coming quarters. Weakness in both of these industries could be poised to significantly lower demand for companies like Applied Materials.
Intel (INTC) and Advanced Micro Devices (AMD) shares have been plunging in recent weeks and now trade near 52-week lows. Many solar stocks are also trading at or near 52-week lows. That is a potentially very bad sign for Applied Materials and it could soon see its shares trading at new 52-week lows as well. With many customers in the chip and solar facing tough industry challenges, Applied Materials could be poised to report disappointing earnings or weak guidance, or both.
This company is already starting to feel the slowdown in the PC industry and it recently announced it would cut about 9% of its workforce in a restructuring that it hopes will save the company $140 to $190 million per year. One recent Bloomberg article summarizes the challenges facing the PC industry and Applied Materials:
"The PC market may grow by less than 1 percent this year, its worst showing in more than a decade, according to market researcher IDC. That means Applied Materials' customers, such as Intel Corp. , face slowing orders for components, reducing their appetite for spending to increase output."
Intel, one of Applied Materials' largest customers, recently warned that third quarter financial results would come in considerably lower than previously forecast. Revenue estimates are now expected to be around $13.8 billion versus prior estimates that were as high as about $14.8 billion. When an industry leader like Intel has to cut forecasts in such a significant way, it is likely that other tech companies could be seeing similar weakness and cut back on capital spending plans for the coming quarters. That's why I believe Applied Materials is poised to report weak earnings and guidance, and possibly fall to new 52-week lows which is right around $10 per share. Another reason the stock could decline is because it appears expensive when compared to many other tech companies. Applied Materials shares trade for nearly 16 times earnings, while stocks like Intel and many others tech companies trade for just around 10 times earnings. A PE ratio of 10 could put Applied Materials shares at about $7. That may or may not happen, but it sure seems like the stock is going to have a hard time holding $11 for much longer.
Key Data Points For Applied Materials From Yahoo Finance:
Current Share Price: $11.01
52-Week Range: $9.97 to $13.94
Dividend: 36 cents which yields 3.2%
2012 Earnings Estimate: 72 cents per share
2013 Earnings Estimate: 76 cents per share
P/E Ratio: about 15.5 times earnings
Key Data Points For Intel From Yahoo Finance:
Current Share Price: $22.51
52-Week Range: $22.27 to $29.27
Dividend: 90 cents which yields 4%
2012 Earnings Estimate: $2.13 per share
2013 Earnings Estimate: $2.19 per share
P/E Ratio: about 10 times earnings
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.