Applied Materials’ stock price hits an inflection point
Applied Materials (AMAT) stock has risen 86% over the past 12 months to a 17-year high of $44. This growth is being driven by strong capital spending by semiconductor manufacturers. The last time Applied Materials stock reached an inflection point was in 2000, when the semiconductor industry transitioned from 200-mm (millimeter) wafers to 300-mm wafers.
How does Applied Materials earn money?
However, this cycle breaks when there is an oversupply in the market, which reduces demand and discourages chipmakers from improving capacity. Such a situation occurred with the DRAM (dynamic random access memory) market in 2015, leading to Samsung and SK Hynix stopping their DRAM production.
Semiconductor industry undergoes transition
In 2016, several key semiconductor companies started transitioning to advanced technology due to the advent of emerging technologies such as the IoT (Internet of Things), VR/AR (virtual reality/augmented reality), big data, AI (artificial intelligence), and self-driving cars.
This transition boosted Applied Materials’ revenue to new highs over four quarters. Rivals KLA-Tencor (KLAC) and Lam Research (LRCX) have also reported double-digit growth, over three quarters. Record earnings and rising stock prices raised fears among investors that the stock might soon come crashing down.
However, Applied Materials’ latest fiscal 2Q17 earnings erased these fears with record revenue and guidance. In Applied Materials’ fiscal 2Q17 earnings call, CEO Gary Dickerson stated that the company is growing faster than the market, gaining market share and expanding its revenue streams beyond semiconductors and into OLEDs (organic light-emitting diodes).
Technology inflection is here to stay
Emerging technologies are boosting capital equipment spending and making them more stable than cyclical. The NAND memory market is transitioning from 2D planar technology to 3D technology. Foundries are switching to smaller nodes due to customers’ demand for more advanced processes.
Gartner estimates that capital spending in wafer-level packaging and assembly equipment will increase 9.9% and 11.4% in calendar 2017 and 2018, respectively. These estimates suggest that there will be strong demand for Applied Materials’ products over the next two years.
At the company’s 2016 Analyst Day, Dickerson stated that the above factors could drive growth over the next three years. These cyclical trends will stabilize as the IoT, VR, AI, and autonomous cars become mainstream. In this series, we’ll look at the factors driving Applied Materials’ fiscal 2017 earnings.