Maker of machinery employed in semiconductor manufacturing, Applied Materials (NASDAQ:AMAT) beat analysts' expectations in Q1 CY2024, with revenue flat year on year at $6.65 billion. The company also expects next quarter's revenue to be around $6.65 billion, slightly above analysts' estimates. It made a non-GAAP profit of $2.09 per share, improving from its profit of $2.00 per share in the same quarter last year.

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“Applied Materials continues to deliver strong performance in 2024, with fiscal second quarter revenue and earnings towards the high end of our guided range,” said Gary Dickerson, President and CEO.

Founded in 1967 as the first company to develop tools for other businesses in the semiconductor industry, Applied Materials (NASDAQ:AMAT) is the largest provider of semiconductor wafer fabrication equipment.

Semiconductor Manufacturing

The semiconductor industry is driven by demand for advanced electronic products like smartphones, PCs, servers, and data storage. The need for technologies like artificial intelligence, 5G networks, and smart cars is also creating the next wave of growth for the industry. Keeping up with this dynamism requires new tools that can design, fabricate, and test chips at ever smaller sizes and more complex architectures, creating a dire need for semiconductor capital manufacturing equipment.

Sales Growth

Applied Materials's revenue growth over the last three years has been unremarkable, averaging 11% annually. As you can see below, this was a weaker quarter for the company, with revenue growing from $6.63 billion in the same quarter last year to $6.65 billion. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

While Applied Materials beat analysts' revenue estimates, this was a sluggish quarter for the company as its revenue only grew 0.2% year on year. Applied Materials's growth, however, flipped from negative to positive this quarter. This encouraging sign will likely be welcomed by shareholders.

Applied Materials returned to positive revenue growth this quarter and its management team expects the trend to continue. The company is guiding to 3.5% year-on-year growth next quarter, and analysts seem to agree, forecasting 5.5% growth over the next 12 months.

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Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, Applied Materials's DIO came in at 148, which is 7 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.

Key Takeaways from Applied Materials's Q1 Results

We enjoyed seeing Applied Materials exceed analysts' revenue and EPS expectations this quarter. Next quarter's guidance was also solid, with the revenue and EPS outlooks coming in ahead of expectations. On the other hand, its operating margin regrettably fell. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. Investors were likely expecting more, and the stock is down 1.3% after reporting, trading at $211.42 per share.

So should you invest in Applied Materials right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.