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Applied Materials stock and the semiconductor industry

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Jan. 14 2015, Updated 11:53 a.m. ET

Merger with Tokyo Electron

As mentioned earlier in this series, Applied Materials and Tokyo Electron are merging to form Eteris, with the aim of further strengthening its position in the semiconductor industry. Eteris is expected to be a $29 billion company.

Owing to its size, there is a strong likelihood that it may attract antitrust concerns in multiple jurisdictions. Originally expected to be completed in 2Q14, the closure of the Applied Materials–Tokyo Electron deal was pushed forward to 1Q15. In the event that the formation of Eteris is not approved by regulators, it might lead to a temporary dip in Applied’s stock price.

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Success dependent on key customers’ success

Intel (INTC), Samsung (SSNLF), and Taiwan Semiconductor Manufacturing (TSM) are key customers of Applied Materials (AMAT). Because the semiconductor industry is cyclical, even its leading players—Intel, Qualcomm (QCOM), Taiwan Semiconductor Manufacturing, and Texas Instruments (TXN)—find it difficult to sail through in challenging times.

The above chart shows the life cycle of major semiconductor devices. As a result, Applied Materials experiences cyclical earnings results as its core customers (the providers and makers of chips, displays, and solar panels) react to demand by increasing or cutting back their production capacity. Applied Materials’s success and revenue growth is highly dependent on the growth of these companies, which are major contributors to the company’s overall revenues.

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