Applied Materials (NASDAQ:AMAT), the semiconductor fabrication equipment supplier, posted its Q2 2012 result this Thursday. Though it reported a 16% sequential gain in revenues, we stick to our view that the current year will continue to bear the brunt of a slowdown in the industry and the positive impact of a revival will be seen next year onwards.
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. Applied competes with other semiconductor equipment manufacturers such as ASML Holding N.V. (NASDAQ: ASML), Tokyo Electron and Lam Research (NASDAQ:LRCX). The company witnessed a growth in orders for silicon systems, applied global services and the display segments. However, the net sales from its energy & environmental solutions division was down 62% reflecting excessive manufacturing capacity in the solar industry. Here we analyze certain factors to look out for in 2012 and their impact on the company’s stock value –
Slowdown in Semiconductor Capital Equipment Spending
Owing to weak market conditions in the second half of 2011, most semiconductor companies pulled back their expansion plans, to match productivity with end user demand. 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. 
While a number of indicators point towards stronger growth in the global economy in the second half of the year, the company remains mindful of consumer spending implications resulting from macroeconomic risks in Europe and the emerging markets. Yet, with strong orders in the semiconductor equipment business driven by robust foundry spending, we expect the situation to smooth out in the next two quarters and hope to see revival in the market in the latter part of 2012.
With a contribution of over 57% to our price estimate, Silicon Wafer Fab equipment business remain the most important division in Applied’s portfolio. The company saw a number of product wins in 2011 and also benefited from the acquisition of Varian Semiconductors. Revenue contribution from Varian saw a sequential increase of 37%, indicating an increase in positive synergies from the acquisition. We believe Applied’s market share will increase by 2% in the current year, but estimate it to remain constant over major part of our forecast period.
Weak Solar and Display Businesses
The display and solar business remain weak as television sales continue to be sluggish and the solar market adjusts to excess manufacturing capacity. The company plans to lower cost and reduce the annual breakeven level for the energy & environmental division to approximately $500 million.
The current orders in the display divisions are being supported by mobility applications, as high-resolution mobile displays migrate from smartphones to tablets and touch panel manufacturers add capacity in anticipation of touch-enabled ultrabooks. Additionally, with panel prices increasing and factory utilization trending higher the company expect TV-related orders to pick up in the second half of 2012. Though we do not see an increase in the energy and environmental solution market in 2012, we do believe that the display business will rebound in the current year.
Growth in Smartphones and Tablets
Global appetite for mobile devices with new features, longer battery life and brighter, higher resolution displays continues to strengthen. As these devices drive demand for leading-edge foundry capacity, the market leaders are aggressively accelerating ramps at advanced nodes.
Foundry investments have contributed close to 60% to Applied’s revenue in the last two quarters, and we expect the company to gain from the favorable trends in smartphones and tablets, going forward.
As the demand supply mismatch corrects and the global economy stabilizes, the industry will overcome the deterioration in the silicon wafer and fabrication equipment markets. However, we do not foresee the positive affects materializing in the current year. We look forward to 2013 as the year of revival in revenues and remain positive on the company’s long term outlook.
We are in the process of updating our model for earnings and will upload our revised estimate for the company soon.Notes:
- Gartner Says Worldwide Semiconductor Manufacturing Equipment Spending to Decline 11.6 Percent in 2012, Gartner Press Release, March 21, 2012 [↩]