Applied Materials Plunges After DoJ Probe Report On Shipments To China

Shares of Applied Materials tumbled in premarket trading in New York following a Reuters report that disclosed the largest US maker of chipmaking machinery faces a US criminal investigation for allegedly violating export restrictions to China. 

The Justice Department is investigating Applied Materials' dealings with China's biggest chipmaker, Semiconductor Manufacturing International Corp. One source said Applied Materials sent hundreds of millions of dollars in semiconductor equipment to SMIC without export licenses. 

"Applied Materials first disclosed in October 2022 that it received a subpoena from the US Attorney's Office for the District of Massachusetts requesting information relating to certain China customer shipments," the company told Bloomberg in an emailed statement. 

It added: "The company is cooperating with the government and remains committed to compliance with global laws, including export controls and trade regulations."

This comes as the Biden administration has expanded US restrictions on advanced chips and chipmaking equipment to China for national security purposes. Also, the DoJ and Commerce departments launched a task force this year to investigate and prosecute violators of export controls. The rules are to prevent China's military and intelligence capabilities from expanding. 

In September, Huawei Technologies Co. shocked Washington by revealing a cutting-edge 7-nanometer processor smartphone in China. Bloomberg broke down the Huawei Mate 60 Pro and found it was equipped with a Kirin 9000s chip manufactured in China by SMIC. 

Shares of Applied Materials shares sank 7% in premarket trading. 

The report also noted the chipmaking equipment in question was produced in Massachusetts and then shipped to a subsidiary in South Korea, where it was then sent to SMIC, according to the sources familiar with the DoJ's investigation. 

News of the probe overshadowed an earnings report. 

Here's a snapshot of fourth-quarter results:

• Adjusted EPS $2.12 vs. $2.03 y/y, estimate $1.99
• Net sales $6.72 billion, -0.4% y/y, estimate $6.54 billion
• Semiconductor Systems net sales $4.88 billion, -3.1% y/y, estimate $4.77 billion
• Applied Global Services net sales $1.47 billion, +3.6% y/y, estimate $1.44 billion
• Display and Adjacent Markets net sales $298 million, +19% y/y, estimate $280.3 million
• Adjusted gross margin 47.3% vs. 46% y/y, estimate 47%

And the first quarter forecast: 

• Sees net sales about $6.47 billion, estimate $6.34 billion (Bloomberg Consensus)
• Sees adjusted EPS $1.72 to $2.08, estimate $1.84
• Sees adjusted gross margin about 47%, estimate 46.7%
• Sees adjusted operating expenses about $1.23 billion, estimate $1.21 billion

Wall Street analysts were overwhelmingly pessimistic about the probe (list courtesy of Bloomberg)

Berenberg (Tammy Qiu; buy) 

• The news of the probe may have a negative read across for semiconductor equipment suppliers — "due to the potential unpredictable impact on their operations and shipments to China in future"
• Meanwhile, just like its peers, Applied Materials reported significant revenue from China 

Cowen (Krish Sankar; outperform)

• For now, view the DoJ investigation as a negative headline 
• "Investors could view the 2024 growth outlook as being mixed"

Citi (Atif Malik; buy)

• "Do not anticipate further government restrictions and assume a worse case fine similar to Seagate's $300M fine for shipping to Huawei"
• Reiterate buy rating as continue to expect recovery in 2024/25

Bloomberg Intelligence (Masahiro Wakasugi)

• "Applied Materials could have about 5% of its sales disrupted if US authorities saddle it with additional restrictions on exports to China," according to Bloomberg Intelligence calculations
• "The effect of sanctions could be similar and the long-term impact modest" as the company's sales to China are comparable to that of its peers 

Morgan Stanley (Joseph Moore; equal-weight)

• See semicap stocks "somewhat ahead of themselves" after the rally this year
• However, Applied Materials' October quarter was very strong, with strength from China 
• PT raised to $142 from $139 

Goldman Sachs

• AMAT is down -5% overnight after it announced it is facing a criminal investigation for violating export restrictions.  AMAT's China revs were 44% of total last quarter? LRCX was 48%? Should we be worried about the broader semis complex regarding the sustainability of their revs? NVDA next week.

Beijing will be closely monitoring the events unfolding.