Applied Materials Stock Drops. Why the Chipmaking Equipment Boom Is Under Threat.

Applied Materials shares have gained more than 40% in the past month. (David Paul Morris/Bloomberg)

Key Points

• Applied Materials anticipates a $710 million revenue reduction due to new export restrictions on sales to China-based customers.
• The new rules are projected to decrease Applied Materials’ fourth-quarter revenue by $110 million and 2026 revenue by $600 million.
• China has accounted for approximately 30% of Applied Materials’ sales this year, with a 10% quarter-on-quarter sales drop expected in the fourth quarter.

Applied Materials and its chipmaking equipment peers Lam Research and KLA were dropping early on Friday. New export restrictions threaten to hurt their business in China, where the companies already face rising competition.

Applied Materials expects a $710 million hit to its revenue from new export restrictions published by the Bureau of Industry and Security.

The changes mean it won’t be able to export certain products to China-based customers without a license, the company said in a filing on Thursday. The new rules are expected to reduce Applied Materials’ fourth-quarter revenue by $110 million and 2026 revenue by $600 million, it said.

China represented around 30% of Applied Materials’ sales this year so far and the company had already signaled a meaningful drop in Chinese revenue, Stifel analyst Brian Chin noted in a research note. He estimated Applied Materials is likely to suffer a 10% quarter-on-quarter sales drop in the fourth quarter.

“We expect other semi equipment peers/suppliers to have some, albeit varied negative exposure, which again highlights ongoing US-China trade friction/risk,” Chin wrote.

Applied Materials stock was down 1.4% at $220.51 in premarket trading. Lam was falling 0.6% and KLA was down 0.8%.

Those moves are set to put only a small dent in the chipmaking equipment companies’ impressive gains this year so far, driven by increasing demand for wafer fabrication equipment, or WFE. Applied stock has climbed 37% this year, as of Thursday’s close, while Lam is up 104% and KLA has risen 81% over the same period.

The Trump administration is aiming to restrict the Chinese its domestic chipmaking sector but the incentive for China to become self sufficient could be a longer term headwind for the sector.

China represents 20-25% of the global WFE market and domestic equipment players have 11% to 13% global market share in certain market segments, according to Rothschild & Co Redburn analyst Timm Schulze-Melander.

“Our analysis concludes that while almost all semicap equipment suppliers face some degree of challenge from China-based rivals, Applied Materials’ earnings base is the most threatened by China competition,” Schulze-Melander wrote in a research note this week.

In particular, Applied Materials is vulnerable to losing market share in the Physical Vapor Deposition, or PVD, market which accounts for almost a third of its equipment operating profits.

Schulze-Melander has a Neutral rating and $190 target price on Applied Materials stock.

Write to Adam Clark at adam.clark@barrons.com