Updated from Nov. 12

Shares of chip-equipment maker

Applied Materials

(AMAT) - Get Report

lost ground amid Wall Street chatter over their pricey valuation, a day after the company forecast outsize 20% order growth in its upcoming January quarter.

The stock was down 38 cents or 1.5% to $25.06 in mid-afternoon trading.

Many analysts seemed hard-pressed to justify Applied's stock price, while acknowledging an industry turnaround is clearly under way.

"The order growth is there for the momentum junkies, in our view," acknowledged Banc of America's Mark FitzGerald in a morning note. "In our opinion, the leverage story was the only chink in an otherwise outstanding quarter. Gross margins fell a bit short of our estimates and we pulled back the January projections. But the company is still cutting costs, so we believe it is too early to see the complete benefits."

But he said fiscal year 2004 estimates would need to be in the $1 range to support AMAT's current stock price, and he estimates the company will earn only 62 cents in the period. FitzGerald has a neutral rating on AMAT; his firm hasn't banked for it.

At Needham, Cristina Osmena said she's keeping a hold on Applied shares. "The company's market cap is similar to its market cap at the end of 1999 while expected growth in the following year, though strong, is lower. At 9.8 times trailing sales, valuation is approaching levels only seen during the 2000 peak," she pointed out. Needham hasn't recently banked for AMAT.

On a less negative note, Deutsche Bank's Timothy Arcuri called the report "mixed to slightly positive" after Applied's conference call last night. Gross margins were slightly worse than expected, due to pressure from the company's services arm, he notes. But he says that's a problem that can likely be fixed over the next six months or so.

"The way the stock works and what investors value here, I'd suspect orders trumps that," he said. He had a buy rating on the stock heading into the conference call.

Yesterday ,Applied beat Wall Street expectations on the top and bottom lines in its October quarter, though its profit suffered from restructuring costs.

Applied reported net sales of $1.22 billion, down 16% from last year's levels and above the consensus estimate for $1.14 billion.

Gross margin slid to 40.5%, down from last year's 41.7%.

Net income totaled $15 million, or a penny a share according to generally accepted accounting principles, below last year's profit of $147 million. Net income took a hit from a pretax charge of $114 million to consolidate facilities and employee-related restructuring costs.

Excluding the charge, AMAT would have posted a profit of 6 cents a share, a penny above expectations.

The company said new orders rose 21% from the prior quarter.

The latest results "indicate what we believe is a turning point for the equipment industry," said CEO Mike Splinter. "Fourth-quarter revenues were up, earnings were up and we expect the momentum to carry through the first quarter." He said he was seeing "clear signs of an upturn in worldwide fabrication equipment spending."

Among positive signs, he noted semiconductor companies are now using about 90% of factory capacity to keep up with demand -- a trend "requiring quick action to support capacity increases," he said.

Japanese chipmakers, foundries and DRAM makers were among the source of strength in the quarter, with DRAM accounting for about 26% of orders, down from 47% last quarter.

More than 60% of Applied's orders were for 300 mm equipment.

For the January quarter, Applied forecast revenue growth of 5% to 8%, implying sales of between $1.28 billion and $1.32 billion. That revenue range is above the Wall Street consensus estimate for $1.24 billion.

Pro forma EPS should range from 6 cents to 8 cents, compared with Wall Street's 8-cent outlook. Applied said it plans to wrap up its four-quarter restructuring program with a charge of $75 million to $125 million to consolidate facilities.

Order growth of 20% is expected to come from large companies that design and make their own chips, foundries and DRAM makers.

Applied also reported results for its fiscal year ended in October. In fiscal 2003, sales declined 12% to $4.48 billion, and the company posted a net loss of $149 million, or 9 cents a share, down from its 2002 profit of $269 million.