AMAT warning might not be tech's death knell

Applied Materials' AMAT profit warning this week might not pack the same sucker punch for the tech industry that it might have in days of old -- back when 2 times sales marked tough valuations for the sector.

The warning will reinforce the opinion of shareholders who already had their doubts about tech spending.

Here are a few reasons to think it is not a death knell:

-- Foundry weakness has been somewhat expected, especially among industry giants such as Taiwan Semiconductor TSM. Analysts might have been a little slow to lower estimates, considering slowing PC sales and AMD's AMD warning. Yet the markets did appear to be looking ahead: AMAT hit its 2012 price peak in February. The Technology Select Sector SPDR XLK representing the tech industry, and the S&P 500 peaked two months later.

-- Management still spoke bullishly about demand in fiscal 2013; they could have thrown in the kitchen sink. They didn't.

-- AMAT is now attractive to dividend-seeking investors looking to get paid to ride out market uncertainty. It has a 3.3% dividend yield and is executing on its plan to return cash to shareholders.

-- Broad chip weakness is not conclusive. Advanced Micro Devices just warned, sure. But Texas Instruments TXN narrowed its guidance range in June. Also, tech has had fewer Q2 earnings warnings than other sectors – especially consumer discretionary.

-- This is not your father's AMAT. It now has a large solar photovoltaic business. And that part of the company has been in decline for about a year, as European subsidies for solar projects have come under big-time pressure. CEO Michael Splinter said that capex in the solar industry is now at levels when the industry was a quarter of its size today. AMAT has been beating estimates with exceptional demand from chip foundries. Something short of a disaster in the PV market might have helped to mitigate the company's mostly foundry-related miss.


Here are reasons to consider it as a bad omen:

-- This was not a company-specific warning. There was no mention of lost market share. The largest chip-equipment maker appears to be seeing lower equipment bookings from customers -- the one that makes the machines that the Intel's INTC of the tech world use to boost their chip output. That gives analysts every reason to be scrutinizing production capacity and inventory levels among the chipmakers. Meanwhile, foundries remain in a tough spot trying to gauge customer demand due to the European debt crisis and a Chinese economic slowdown.

-- Chips are a very cyclical industry. Additional evidence of cutbacks in equipment purchases could provide an early warning for decreased chip demand that lasts for several quarters.

-- It wasn't just foundry weakness: Flash memory makers also pushed out their orders. That had been one of AMAT's strongest demand sources in past quarters.

-- Management flat-out said that the company is seeing increased seasonality, coupled with a weak macroeconomic environment. It reflects uncertainty.

-- The $10 technical support is strong, but it arguably must be held. One technical interpretation of the stock price action since late 2009 is that the stock is in a complex head-and-shoulders pattern. A break below the "shoulder" of that pattern at $10 projects a downward move to the low single-digits for AMAT shares.

Posted In: NewsAMDapplied materialsTechnology
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