Applied Materials (NASDAQ:AMAT), the world’s largest semiconductor fabrication equipment supplier, is set to announce its Q2 2012 result on 17th May. It competes with other semiconductor equipment manufacturers such as ASML Holding N.V. (NASDAQ: ASML), Tokyo Electron (8035:TOKYO) and Lam Research (NASDAQ:LRCX).
On account of a slowdown in the global semiconductor industry, the 2011 results were not as spectacular as 2010. We do not expect this quarter to be any different as reduced capital equipment spending is likely to persist till mid 2012. However, the improving economic scenario and a consequent revival in demand for consumer products raise hope for a better performance towards the end of the year.
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Decline in Worldwide Semiconductor Capital Equipment Spending
According to research firm Gartner, the worldwide semiconductor manufacturing equipment spending is expected to total 38.9 billion in 2012, an 11.6 % decline from 2011 spending of $44 billion. 
Weak market conditions in the second half of 2011 caused pullbacks in expansion plans throughout the industry, as manufacturers adjusted their production levels to match end-user demand. The condition is likely to persist in the first half of 2012. However, with increasing stability in the economic condition and a rebound in the global PC market, we are likely to witness an increase in utilization levels to support growing demand. As the downward pressure on utilization rates ease, DRAM and foundry manufacturers will begin to increase spending.
The wafer fab equipment (WFE) market saw spending increase by 13.3% in 2011. However, this year Gartner forecasts it to decline by 12.7%, as the capacity utilization decline into the low 80 percent range by the middle of 2012, before slowly increasing to about 90 percent by the end of the year. 
Applied Material launched 8 new transistor and interconnect products in 2011 and consequently gained a number or product wins. With its leading product offerings and sustained investment into R&D, we believe that it will see a 2% increase in its market share, despite the decrease in capital spending by semiconductor companies. The silicon wafer fab equipment contributes close to 57% to our price estimate, making it the most valuable segment in AMAT’s portfolio.
Acquisition of Varian Semiconductors
In November last year, Applied completed its acquisition of Varian Semiconductors (NASDAQ:VSEA), a leader in ion implantation equipment, a market that represents an annual opportunity approaching $1.5 billion. 
The acquisition of Varian enhances Applied’s extensive portfolio and it is likely to become the industry leader in transistor technologies, enabling it to support customers with complementary solutions for advanced chip manufacturing.
The partnership can also be expected to increase its revenue from the environmental and energy solutions group, as Varian’s technology has a great potential in solar cell manufacturing. We believe that Applied Material’s share in the environmental and energy solutions will go up slightly in 2012 and stabilize thereon till the end of our forecast period.
Smartphone and Tablet Devices Likely to Drive Demand for Display Technologies
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 at achieving more efficient manufacturing to lower prices, and to improve the technology to keep it ahead of LCD technology. This is driving investment both to expand capacity and also for technology up-gradation.
Applied Materials has a significant presence in the smartphone and tablet market. It expects to generate more than $250 million of revenue from products that serve new applications in this area. It is strengthening its market share position and its product portfolio to see an increase in revenue from this segment.
Overall, we expect to witness a slow start to the year. However, as we overcome the deterioration in the silicon wafer and fabrication equipment market, we could witness a pick-up in pace in the latter half of the year. New application processors for smartphones and tablets and an extended portfolio with the Varian acquisition, give the company a positive outlook for the years ahead.
We maintain our price estimate of $13.02, a premium of about 15% to the current market price.Notes:
- Gartner Says Worldwide Semiconductor Manufacturing Equipment Spending to Decline 11.6 Percent in 2012, Gartner Press Release, March 21, 2012 [↩] [↩]
- Applied Materials Completes Acquisition of Varian Semiconductor Equipment Associates, Press Release, November 10, 2011 [↩]