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Why Applied Materials, Inc. Stock Fell 11.5% Last Month

Anders Bylund, The Motley Fool

What happened

Shares of Applied Materials (NASDAQ: AMAT) fell 11.5% in August of 2018, according to data from S&P Global Market Intelligence. More than half of the pain arrived on the heels of the third-quarter report near the middle of the month.

So what

The maker of equipment used in the manufacturing process for semiconductors and solar cells reported third-quarter earnings of $1.20 per share on sales of $4.47 billion. Your average analyst would have settled for earnings near $1.17 per share on sales in the neighborhood of $4.43 billion, so Applied Materials beat the Street on both counts.

However, management's earnings and revenue guidance for the fourth quarter came up short. Applied Materials expects earnings of approximately $0.96 per share in the year-end period, paired with top-line sales near $4.0 billion. The Wall Street consensus had been calling for earnings of roughly $1.17 per share on sales near $4.5 billion.

Chip manufacturing tools hard at work on an uncut wafer of semiconductor silicon.

Image source: Getty Images.

Now what

The weak fourth-quarter guidance rested on lower order volumes for semiconductor foundry equipment, with a couple of important caveats.

Applied Materials is still on track to deliver all-time record sales in this segment for 2018 as a whole. The longer-term market view also remains optimistic as semiconductors make their way into larger and larger portions of modern life. Applied Materials plays a significant role in driving that macro-level market trend. At the moment, many chip makers are reshuffling their capital investment plans with an eye toward next-generation manufacturing technologies.

According to CFO Dan Durn, Applied Materials' split between next-generation equipment and legacy products now stands at roughly 50/50 -- a drastic shift from the 80/20 balance seen just a few years ago. It takes the company a bit longer to build and deliver these leading-edge machines, pushing a larger portion of its incoming orders into upcoming financial reporting periods.

I wouldn't worry too much about one disappointing guidance package. Applied Materials still looks like a solid investment for the long run, now trading at the bargain-bin valuation of just 9 times trailing earnings.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.