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What Are Applied Materials’ Future Growth Prospects?

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Nov. 16 2015, Published 10:37 a.m. ET

Slowdown in equipment spending

In the last part of the series, we saw that Applied Materials (AMAT) posted lower guidance for fiscal 1Q16. It declared that it’s open to a merger. Let’s analyze the factors that forced the company to consider a merger.

The company’s revenue largely depends on the wafer fabrication equipment spending by foundries and semiconductors. As you can see in the above chart, Gartner estimates the worldwide wafer fabrication equipment spending to fall by 3.7% in 2016. Then, it expects it to resume growth but at a slower pace. The company is well placed to withstand the current headwinds and report growth in the long term.

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New orders

Applied Materials is a dominant player in the chip equipment market. It holds a strong position in both the foundry and memory segments. In fiscal 4Q15, the company’s Silicon Systems division reported 8% YoY (year-over-year) growth in new orders to $1.4 billion. Of the growth, 35% was for foundry equipment, 21% was for DRAM (dynamic random-access memory) equipment, 31% was for Flash memory equipment, and 13% was for logic and other equipment.

Memory market could drive growth

The memory industry is shifting towards more advanced memory products, 3D NAND (negative AND), and FinFET circuit structures. Companies like Samsung (SSNLF), TSMC (TSM), and Intel (INTC) are investing in these technologies. Applied Materials is in place to tap this growth opportunity. It expects the FinFET technology to be a key growth driver.

Divestment of the solar business

Applied Materials’ strategy is to divest businesses that earn operating margins of less than 20%. The company has been gradually divesting its Energy and Environmental Solutions division. It has been posting negative operating margins for the past several years. The division has been hit by a continuing fall in solar capital spending due to overcapacity.

You can get exposure to Applied Materials by investing in the SPDR S&P 500 ETF (SPY). It has a 0.11% holding in the company’s stock.

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