Shares of the semiconductor manufacturing technology provider Applied Materials Inc. traded lower after-hours today in the wake of a report that it’s being investigated by the U.S. Justice Department for violating export restrictions by shipping products to a leading Chinese chipmaker.

The report from Reuters emerged shortly after the company released its fourth-quarter earnings results today, claiming that the company is being probed for allegedly evading restrictions on Semiconductor Manufacturing International Corp., the top chipmaker in China.

The largest U.S.-based chip equipment manufacturer is alleged to have sent equipment to SMIC via South Korea without the appropriate export licenses, three sources told Reuters. The shipments apparently involved equipment worth “hundreds of millions of dollars.” Applied Materials’ stock was down more than 7% in extended trading after the report.

The U.S. Commerce Department has placed severe restrictions on the shipment of advanced computer chips and chipmaking equipment to China, citing national security concerns. As a result, chipmakers and semiconductor equipment providers are required to obtain an export license to sell those products to Chinese customers. It’s said that the Justice and Commerce departments have created a task force to investigate and prosecute any violations of those controls.

In October 2022, Applied Materials disclosed that it had been subpoenaed by the U.S. Attorney’s Office in Massachusetts to provide more information on certain shipments to customers in China. According to Reuters, the U.S. Attorney’s office in Boston would not confirm or deny any investigation is underway.

Reuters added that it isn’t clear if the probe will result in any charges, and said it cannot determine if the company violated the law.

However, its sources allege that the company shipped equipment from its U.S. plant in Massachusetts to a subsidiary in South Korea, and from there it was sent to SMIC in China. The shipments took place in 2021 and 2022, after SMIC was added to the Commerce Department’s Entity List in December 2020.

On an earnings call, Applied Materials Chief Financial Officer Brice Hill declined to comment on the report, saying that “we did disclose this last October.”

The company reported adjusted earnings per share of $2.12, beating Wall Street’s forecast of $1.99 in earnings. Revenue for the period came to $6.7 billion, also ahead of the analysts’ target of $6.5 billion. Net income for the period came to $2.4 billion, up from $1.59 billion a year earlier.

Holger Mueller of Constellation Research Inc. said the investigation is of interest to investors, not so much because of any potential fines, but because a huge of the company’s revenue stems from China. “While revenue from Taiwan plunged more than 50%, sales to China hit almost $3 billion in the last quarter, eclipsing the rest of its Asian revenue,” the analyst pointed out. “Given that swing, it is no surprise that Applied Materials is being investigated for potential export control violations, and that is why investors are so concerned.”

Looking ahead, Applied Materials said it’s expecting fiscal 2024 first quarter revenue of approximately $6.5 billion, just above the consensus view of $6.4 billion.

Photo: Applied Materials