Make or Break Chart Level at $20 for Applied Materials

Technology

Published: May 21, 2014 11:30 am

Applied Materials Inc. (NASDAQ: AMAT) is within grasp of a multiyear (a decade or so) technical breakout pattern. This chip equipment behemoth has had a very hard staying above $20 in the past, and the post-earnings reaction from the prior week is trying to fight over the $20 handle. It is likely the fundamental continuation of business that will decide this more than a bunch of technical traders.

As a reminder, Applied Materials is perhaps the most important of the domestic cap-ex stocks when it comes to the semiconductor segment. Its market cap is $24 billion. If its stock breaks out much above the $20 mark, it likely will signal great trends in nearly all aspects of semiconductors for the next 12 to 18 months.

Applied Materials showed revenues in the second quarter were up to $2.35 billion from $1.97 billion a year ago, almost exactly in line with the Thomson Reuters consensus estimate at the time. Excluding items, its earnings per share came in at $0.28, also meeting estimates.

The chip equipment maker’s second-quarter revenue from memory chip providers and smaller format orders continued to counterbalance demand from PC-makers. Applied Materials’ chief executive said along with the earnings report that the company expects OEMs and contract manufacturers to raise their cap-ex investment by close to 20% in 2014 — again from smaller format designs rather than designs for PCs.

Applied Materials’ guidance was for an implied revenue range of $2.23 billion to $2.35 billion, versus a consensus estimate of closer to $2.32 billion.

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Now that chart is playing a game, perhaps from the volatility in the stock market. Applied Materials shares were at $18.60 last week before earnings. They closed above $20 for the next two days ($20.11 and $20.02) and then closed at $19.87 on Tuesday. Wednesday’s range has been $19.84 to $20.07 — and the highs in the past days were $20.14, $20.41 and $20.29.

So, can Applied Materials make the breakout above $20 again? It is back to the pre-recession highs. The big question is whether the company can live up to its growth expectations in the next two years. Earnings are expected to rise to $1.06 per share in 2014, up from $0.59 a year ago, and then up to $1.33 per share for 2015. Revenue growth is expected to be up 21% to $9.14 billion in 2015 and up almost 9% more to $9.93 billion in 2015.

This values Applied Materials at 15 times 2015 earnings expectations. Even after a big rally in the past year, the company pays a 2.0% dividend yield. As we generally view things fundamentally with a technical analysis as a supplement (pure market technicians are the other way around), we are going to have to wait and see. Until then, the bulls and bears have a lot of in-fighting to do at this $20 handle.