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Investment Overview for Applied Materials (NASDAQ:AMAT)
Applied Materials provides manufacturing equipment, services and software to manufacturers of semiconductor wafers and chips, flat panel liquid crystal displays (LCDs), solar PV cells and modules, and other electronic devices.
Applied Materials is the world’s largest semiconductor fabrication equipment supplier based on revenue. It is also a leading supplier of LCD fabrication equipment to the flat panel display industry and is the leading supplier of solar PV manufacturing systems to the solar industry, based on revenue.
Silicon wafer fab equipment
- Silicon wafer fab equipment market share: We forecast Applied's share in silicon wafer fab equipment market to remain around 13.7% over our review period. However, there could be an upside of approximately 20% if the market share rises to 18% by the end of our forecast period. On the other hand, if the market share declines by 5% from the 2012 levels, there would be a similar downside to our current price estimate for Applied Materials.
- Silicon wafer fab equipment gross profit margin: We forecast the gross margin on Analog products to remain around 49% for the period under forecast. However, due to reduced semiconductor equipment spending, Applied might be forced to cut its prices which could put pressure on margins. There could be a downside of around 6% to our current price estimate if the margins decline by 5%. It is also likely that Applied's continued investment in R&D enables it to develop better equipment which can provide similar benefits to customer at a lower price. There could be an upside of around 6% to our current price estimate if the gross margins at the end of the period increase to 18.3%
Applied Global services
- Applied global services as % of total semiconductor capex: We forecast Applied global services percentage of share in total global semiconductor capex to be around 6% for our forecast period. However for a 5% increase in the market share, there could be a 11% increase in our current price estimate. Likewise, for a 5% decrease in the current market share, there would be a 18% decrease in our current price estimate.
- Applied Global services gross profit margin: We forecast the gross profit margin for services to be around 49% for the period under review. However, for a 5% increase(decrease) in the gross profit margin, there could be a less than 5% upside(downside) to our current price estimate
Applied operates in four reportable segments: Silicon Wafer Fab Equipment Group, Applied Global Services, Display, and Energy and Environmental Solutions.
Silicon Wafer Fab Equipment Group
The Silicon Wafer Fab Equipment segment continues to be the most valuable segment for Applied, generating 62% of revenues and 79% of gross profits 2012. Applied is the market leader in manufacturing equipments for silicon based semiconductor products, and we expect it to retain its leadership due to its superior product portfolio and continued investment in research and development.
Applied Global Services
Applied's offerings in services, particularly those related to yield management and improvements in 200mm manufacturing equipment business, earned it a revenue of over $2bn in 2012, comprising 27% of its overall revenues and 34% of its profits. We expect the demand for Applied's services in fab management and automation to remain strong during our forecast period, as the semiconductor manufacturing process gets more complex and better automation and management services start affecting the yield of semiconductor manufacturers.
Capital spending to decline further in 2013
Semiconductor capital spending increased by around 16% in 2011, as manufacturers continued to add capacity to support end-user semiconductor demand. However, on account of weak macro demand, the market declined in 2012. However, capital spending is easing off and is expected to witness a marginal rise this year. We expect the market to exhibit expansion-contraction patterns thereon based on supply-demand patterns from the end consumer.
2012 witnessed a decline in capital expenditure, as foundries deferred their earlier aggressive investment levels and other manufacturers adjusted their production levels to match end-user demand. Capex is expected to grow in the second half 2013, driven by increasing demand in both the DRAM and NAND flash markets. The next downturn is expected to occur in 2015, as NAND capacity catches up with demand; which is expected be followed by a return to double-digit growth in 2016 as all major device segments add new capacity.
Continued increases in process complexity
The semiconductor industry is ramping up different technology nodes: Foundry are ramping up 28 nm,
logic will transition to 20 nm this year, NAND flash will ramp up the 3X node, and DRAM will be ramping up 4X and 3X. Equipment manufacturers face different issues at each of these nodes, which might create additional challenges for them. The process control segments will grow faster than the overall WFE market during the forecast period because of the increased difficulty in maintaining process stability and achieving acceptable yields at smaller feature sizes.
Display technologies to be driven by smartphone and tablet devices
As LCD demand slows down from TVs and computer display panels, smartphones and tablets are the major end-user segments with high demand for touch-panels and OLED screens. Touch screens are quickly becoming the de-facto standard in mobile phones and other consumer electronic products. OLED manufacturers are looking to increase efficiency to lower prices to improve their technology. This is driving investment both for expanding capacity as well as for technology up-gradation.
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