Applied Materials under criminal probe on shipments to China

Applied Materials (AMAT), one of the largest chipmakers in the US, faces a criminal probe for allegedly violating export restrictions to China, according to a report from Reuters. The Justice Department will investigate the company's dealings with China’s biggest chipmaker Semiconductor Manufacturing International Corp. (0981.HK), specifically looking at whether Applied Materials sold hundreds of millions of dollars of equipment without the proper licenses.

Yahoo Finance Anchors Brad Smith, Seana Smith, and Myles Udland break down the report and what it means for the company going forward.

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Video transcript

BRAD SMITH: We got to talk about Applied Materials out this morning too. Applied Materials shares are falling this morning as the company reportedly faces a criminal probe for shipments to China's top chipmaker, SMIC, according to Reuters. The report alleges that Applied Materials sent hundreds of millions of dollars worth of equipment to SMIC through South Korea to bypass US export bans.

You're taking a look at shares here premarket for Applied Materials. They're down by about 7% here as we're continuing to keep a close eye on that going into the start of today's trading activity. Just to get a look at what they've been doing over the course of this year as well.

Year-to-date this company is still a beneficiary of a lot of the kind of chips attention thrust forward because of the AI trade that chips in this kind of applications, the models, and then the chips being the base of that larger AI trade pillar. They've been one of those beneficiaries over the course of this year.

However, it's come at the same time that there have been some more intellectual property curbs that have been put in place by different nation states to make sure that there's not a stealing or theft of some of those things.

- Yeah. I mean, the actual results from Applied Materials are showing you that the build out of, let's say, fab manufacturing capacity certainly here in the US, that continues. And there's even with an expected slowdown, given the kind of rush that we saw late '21 through last year. And you can kind of see it in the manufacturing investment numbers. Ultimately, that's not leveling off or slowing down quite at the same pace that analysts had feared. So you see fundamentally a strong quarter.

But the stock reaction and the news last night, that Reuters report really speaks to the challenge that I think the AI trade is probably going to-- has had to an extent, but likely becomes a sharpened focus into the second half of next year around the election. What happens if there's a change in the US presidency around the US-China relations? This week, everyone's all excited about that. I guess we're going to get new pandas back.

But ultimately, there is a question about, what can the market be for these Western, specifically, US-based chip makers or companies within the chip supply chain if there is effectively no ability to sell much of that high-end equipment, high-end technology into China. And when these stocks have had such a run, when it has been the main driver for the market overall, it's a very important question for investors to try and answer, particularly since the market action would suggest it has been answered affirmatively.

Meaning this is all going to be fine, this is a huge market, buy it all. There is then an embedded kind of downside risk just because any of these surprises, any of this uncertainty is a negative. Now, Applied Materials comes out last night. They say, we disclosed this last year. Pretty cagey on-- the first question on the call was around this report. I mean, what's the company going to say?

Like they're not going to come out and deny it. There's plenty of legal reasons why they can't say a lot. Cagey in their response. But I think ultimately, the Street today judging that there is some discount around what's the real TAM opportunity for their products if this kind of inquiry is but one of a series that these companies may face.

SEANA SMITH: Yeah. And we know that Applied Materials within this report did post significant revenue here from their exposure to overseas, specifically to China. So we know that obviously could have a real impact here. Down the line, in terms of what this fine could potentially look like.

I was looking at the Street reaction here this morning. Citi coming out saying that they don't anticipate further government restrictions, and assume a worst case fine similar to what we saw at Seagate, $300 million fine for shipping to Huawei. So we'll see. Obviously, it's a real concern for the Street. We're looking at losses just about 7%, I believe, in the premarket.