Applied Materials: In the Middle of a Growth Cycle
Applied Materials: A leader in semiconductor equipment
Applied Materials (AMAT) dominates the global semiconductor equipment market and is the world’s largest supplier of WFE (wafer fabrication equipment), flat panel LCD (liquid crystal displays), and solar photovoltaic cells and modules.
Semiconductor manufacturers are transitioning to advanced technology as the industry witnesses the fourth tech shift toward AI (artificial intelligence) and IoT (Internet of Things). Companies like Samsung (SSNLF), Intel (INTC), and TSMC (TSMC) are upgrading their fabrication facilities, or fabs, to advanced nodes and 3D memory technology.
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This trend has increased semiconductor capital spending, and AMAT is a beneficiary of this shift thanks to its industry-leading position in the WFE space. This shift has converted the 50-year-old company into a growth stock. AMAT stock has risen 64% in the last 12 months.
Wafer fabrication equipment market
According to SEMI’s latest data, worldwide SME (semiconductor manufacturing equipment) billings rose 58% YoY (year-over-year) or 14% sequentially to $13 billion in 1Q17, with the largest growth coming from the Asia-Pacific region. Korea, Taiwan, and China reported YoY growth of 110%, 84%, and 74%, respectively. AMAT’s key clients are located in these areas.
The strength in the SME market shows that Applied Materials is in the middle of a growth cycle. RBC Capital Markets analyst Amit Daryanani reiterated key learnings from an AMAT-sponsored event. He stated that AMAT expects semiconductor capital spending to be above $40 billion in 2017 and $40 billion–$45 billion in 2018. Any volatility in the WFE spending would be mitigated by multiple end-market drivers like data centers, AI, IoT, self-driving cars, and VR/AR (virtual/augmented reality).
AMAT’s opportunities and risks
Applied Materials (AMAT) is betting on OLED (organic light-emitting diode) displays and 3D NAND technologies for its growth as its order book is skewed toward these technologies. However, it is important to note that a company’s order backlog does not guarantee future sales. The company’s large exposure to the volatile Asia-Pacific region exposes it to the risk of uncertainty in future demand.
AMAT appoints new CFO
Despite the risks, the strength in the overall SME industry puts Applied Materials in the growth cycle. At a time when the demand environment is at its peak, AMAT hired NXP Semiconductor’s (NXPI) chief financial officer, Dan Durn, who would replace the former’s retiring CFO, Bob Halliday, in 2018.
Needham & Co. analyst Edwin Mok stated that AMAT’s timing to transition its CFO is correct as the industry up-cycle would mitigate the impact of the transition. Micron Technologies (MU) appointed Sanjay Mehrotra as its new chief executive officer in May 2017 when the memory demand environment was at its peak.
In this series, we will see how the strong demand environment in the SME market could impact AMAT’s fiscal 3Q171 earnings. Applied Materials plans to release its earnings on August 17, 2017.
- fiscal 3Q17 ended July 30, 2017 ↩