Applied Materials (NASDAQ:AMAT) is the world’s leading manufacturer of semiconductor equipment. In 2010, it recorded revenues of over $10 billion and a gross profit of around $4.7 billion and had market share of over 14% in the global $40 billion semiconductor equipment manufacturing industry. Applied Materials competes with other large equipment manufacturers such as the Europe based ASML N.V and Japan based Tokyo Electron.
We recently launched coverage on Applied Materials with a $11.50 price estimate for the company’s stock. Our estimate is around 33% ahead of the market price.
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Launch of Coverage on Applied Materials; $11.50 price estimate
We have broken down our analysis of F5 networks into three major segments:
Global Semiconductor Manufacturing Equipment market
The global semiconductor manufacturing equipment industry is driven by the semiconductor manufacturers’ capital spending cycles. The capital spending cycles are in turn a result of the end-user spending on semiconductors which is driven by demand from computing, telecommunications, consumer electronics, industrial electronics and other various industries.
Global semiconductor capital spending in 2010 was $56 billion, out of which over $40 billion was spend on manufacturing equipment alone. Capital spending has however, slowed down in 2011, growing just 9.4% from 2010, compared to over 100% growth seen in 2010. The market is expected to decline by around 20% in 2012.
Capital spending in other related segments like Display (LCD panel manufacturing) is also expected to decline by around 20%, whereas the energy solutions market (PV and solar cell manufacturing equipment) is expected to fall by 50%.
Applied’s advantage in semiconductor manufacturing equipment
Applied’s semiconductor wafer fab equipment segment accounts for around 50% of its value. Applied has long been the market leader in semiconductor wafer fab equipment. Applied Materials launched 8 new transistor and interconnect products in Q2 2011, and gained a number of product wins. Applied’s leading product offerings and its sustained investment into R&D (around 20% of gross profit) keeps it ahead of its competitors and hence ensures it to maintain its market share.
Applied Material’s market share in 2010 was 14% in the semiconductor wafer fab manufacturing equipment market. We expect the market share of Applied Materials to not undergo much change during the forecast period.
On November 10, Applied completed the acquisition of Varian Semiconductor Equipment for $4.2 billion. Varian semiconductors is a leader in ion implantation equipment. The acquisition is expected to give Applied Materials access to a market of around $1.5 billion. This partnership can be expected to increase the revenue from the environmental and energy solutions group as Varian’s technology has lot of potential in solar cell manufacturing.