Applied Material’s geographical reach
Applied Materials (AMAT) supplies semiconductor manufacturing equipment globally. Taiwan and South Korea are its biggest markets, as they house the top foundries and memory manufacturers in the world. In Taiwan, AMAT supplies equipment to TSMC (TSM) and UMC. In South Korea (EWY), AMAT supplies equipment to Samsung (SSNLF) Global Foundries.
TSMC and Samsung have been transitioning to a 10-nm (nanometer) node that resulted in a 55.7% sequential revenue growth in Taiwan and a 34% sequential growth in South Korea in fiscal 4Q16. These two markets contributed 54% towards AMAT’s fiscal 4Q16 revenue. Europe came as a big surprise as revenue more than doubled in fiscal 4Q16.
China is AMAT’s next key market
One Asian country that grew significantly in 2016 is China. AMAT believes that strong capital spending in China could drive its revenue over the next five years. This change came after China decided to become self-sufficient in semiconductor manufacturing in 2015.
China is looking to build memory plants in the country, but it lacks IP (intellectual property). Thus, it encouraged memory makers to set up their plants in the nation. Intel (INTC) is investing $5.5 billion on converting its Dalian facility into a memory plant. Two domestic semiconductor manufacturers are also building memory plants in China.
AMAT’s chief financial officer, Bob Halliday, stated that China’s revenue could also be driven by the ramp up of 10.5 TV fabrication facilities.
AMAT’s forecast for China
AMAT expects that up to 13 fabrication facilities will come up in China over the next five years. It expects domestic and multinational companies to spend up to $30 billion on wafer fabrication equipment in China. However, the growth from China could take some time to materialize, as domestic companies lack IP.
On the fiscal 4Q16 earnings call, AMAT chief executive Gary Dickerson stated that the inflection point for China will come in 2018 and not 2017. He believes that 2017 will be more or less similar to 2016 in China.
In the immediate future, AMAT’s growth would largely be driven by Korea, Taiwan, and Europe. Next, we’ll see how this cyclical upturn is affecting AMAT’s balance sheet.