Applied Materials, Inc. AMAT reported strong results for the fiscal third quarter and reiterated its full-year guidance. However, a significant increase in operating expenses would impact the company’s performance in the near term, according to KeyBanc Capital Markets.

The Analyst

KeyBanc’s Weston Twigg maintained an Overweight rating on Applied Materials while reducing the price target from $56 to $54.

The Thesis

Despite the strong results and unchanged 2019 guidance, there is concern around the low gross margin outlook, Twigg said in the note.

Applied Materials’ strong quarterly results were backed by better-than-expected demand for semiconductor equipment. Twigg mentioned, however, that overall demand remained weak in the quarter, with memory producers continuing to limit new capacity and display demand being muted.

Management’s guidance incorporates a low gross margin outlook, suggesting the company may lower pricing to gain market share as well as significantly increase its operating expenses in the January quarter, the analyst said.

He added that the increase in operating expenses does not coincide with expectations of revenue growth in the January quarter.

Although Applied Materials expects demand to recover in 2020, with growth in all segments, near-term headwinds remain, Twigg noted. He lowered the estimates for the fiscal fourth quarter and the full year from 80 cents to 76 cents and from $3.01 to $3.00, respectively.

Price Action

Shares of Applied Materials had declined by 1.8% to $46.28 at time of publishing on Friday.