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Warning from Applied Materials Might Not be Tech's Death Knell

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

Yet the warning will only serve to reinforce the sentiment among shareholders who already doubted tech spending.

Without taking sides, here are the reasons to think it is not a death knell:

-- Foundry weakness has been somewhat expected, especially among industry giants such as Taiwan Semiconductor (NYSE: TSM). Analysts were late to lower estimates, considering slowing PC sales and the warning from Advanced Micro Devices (NYSE: AMD). Yet the markets did appear to be looking ahead as AMAT hit its 2012 year-to-date price peak in February. The Technology Select Sector SPDR (NYSE: XLK) representing the tech industry and the S&P 500 peaked two months later.

-- Management still spoke bullishly about demand for fiscal 2013. They are doing everything they can to sound optimistic.

-- AMAT is now attractive to dividend-seeking investors looking to earn income while riding 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 (NYSE: AMD) just warned investors Monday of decreased revenue. But Texas Instruments (NYSE: 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 capital expenditures in the solar industry are now at the same levels as they were when the industry was a quarter of today's size. AMAT has been beating estimates with exceptional demand from chip foundries. Something short of a disaster in the PV market might have mitigated the company's mostly foundry-related miss.

Here are reasons to think it is indeed 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 ones that makes the machines that the Intel's (NASDAQ: 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 in the midst of the European debt crisis and a Chinese economic slowdown.

-- Additional evidence of cutbacks in equipment purchases could provide an early warning for decreased chip demand that lasts for several quarters.

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

-- Management flat-out stated that the company is seeing increased seasonality coupled with an even weaker macroeconomic environment. That reflects uncertainty.

-- The $10 technical price support for AMAT is strong and will hopefully be maintained. One technical interpretation of the stock price action since late 2009 is that the stock forms a complex head-and-shoulders pattern. A break below the "shoulder" of that pattern at $10/share projects a downward move to the low single-digits for AMAT shares.

Posted-In: Michael Splinter S&P 500News Management Tech Trading Ideas Best of Benzinga


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