Why Applied Materials Stock Crashed Today

Key Points

• Applied Materials beat on sales and earnings last night.

• However, Applied Materials warned that both sales and earnings are heading lower in Q4.

• China sales are one problem. Sales to other semiconductor manufacturers are another.

• 10 stocks we like better than Applied Materials ›

Applied Materials (NASDAQ: AMAT), one of the world's biggest makers of manufacturing equipment for producing semiconductors, crashed 14% through 1:55 p.m. ET despite reporting strong earnings last night.

Analysts forecast Applied would earn $2.36 per share on sales of $7.2 billion in its fiscal Q3. Applied actually earned $2.48 per share, and sales were also stronger than expected at $7.3 billion.

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Applied Materials Q3 earnings

Not all the news was good. Q3 sales grew 8% year over year, and operating profit margin improved by almost 2 full percentage points. However, net income inched up only 4%, although earnings per share matched sales growth at 8%. Earnings per share as calculated according to generally accepted accounting principles (GAAP), moreover, lagged adjusted earnings significantly, coming in at not $2.48 but just $2.22 per share.

Applied Materials' worst news, however, concerned not Q3 profit, but Q4 guidance. Applied warned that it will earn only about $2.11 per share, adjusted, in Q4. Furthermore, sales will decline sequentially, falling by about 8% to perhaps $6.7 billion.

Is Applied Materials stock a sell?

Applied blamed "a dynamic macroeconomic and policy environment, which is creating increased uncertainty and lower visibility in the near term," for lowering guidance in Q4. Of particular concern, management says "digestion of capacity" in China (which stocked up on semiconductor manufacturing equipment to hunker down for President Trump's tariffs) will weigh on Q4 sales. Additionally, purchasing activity by other "leading-edge customers" is looking lumpy, further disrupting sales growth rates.

At 23 times trailing earnings, Applied Materials stock may not look awfully expensive. If sales are starting to shrink, however, looks may be deceiving -- and it may be time to start thinking about selling.

Should you invest $1,000 in Applied Materials right now?

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Applied Materials. The Motley Fool has a disclosure policy.