Applied Materials (NASDAQ:AMAT), a leading semiconductor equipment manufacturer, witnessed a continuous decline in its top line last year as most semiconductor manufacturers lowered their capital spending in light of macro headwinds. Though the downward trend continued in Q1 2013 as well, the 44% increase in orders reiterate the company’s belief that its orders bottomed out at the end of 2012. Applied is set to announce its Q2 2013 earnings Thursday, May 16, and we believe the expected rise in capital investment by its customers provides a strong foundation for the year ahead.
Despite a sharp decline in semiconductor equipment spending, Applied regained its position as the top semiconductor equipment manufacturer in 2012. The company is confident of growing its market share in wafer fab equipment in 2013, and intends to continue investing in its display and solar businesses to leverage potential growth in these markets. We remain optimistic on Applied’s long term prospects as we think that the accelerated changes in device technology and the adoption of new materials in the industry will re-accelerate demand for semiconductor equipment.
Increasing Capital Equipment Spending By Semiconductor Manufactures
Applied’s semiconductor manufacturing systems are used by integrated device manufacturers and foundries to build and package memory, logic and other types of chips. Weak market conditions in 2012 caused pullbacks in expansion plans throughout the industry, as manufacturers adjusted their production levels to match the end-user demand. However, witnessing more than 80% increase in semiconductor orders, Applied scored significant application wins last quarter, which make us believe that the situation could improve this year.
Here are some of the factors that we think will revive demand for semiconductor equipment in the future.
Rising demand for mobile products: With robust expansion in the smartphone and tablet markets, mobile devices are slated to fuel future growth in the semiconductor industry as PCs take a backseat. Research firm IDC estimates global tablet shipments reached 117 million units in 2012, a 65% increase from 2011. It forecasts the market to rise to over 260 million units by 2016.  Gartner estimates the mobile phone shipments to increase from 1.7 billion in 2012 to 2.2 billion units by 2016, and we expect smartphones to account for 60% of the shipments.
Since these devices drive demand for leading-edge foundry capacity, the market leaders are aggressively accelerating ramps at advanced nodes. Applied believes that mobile customers will account for approximately 45% of wafer fab spending in 2013.
Increasing NAND demand to drive memory growth: On account of excess manufacturing capacity and low demand, the memory market (DRAM & NAND) remained weak in 2012, which impacted demand for Applied’s equipment. While Applied claims that DRAM prices have started to rise, it anticipates low levels of investment this year. However, it believes that the NAND demand will grow by close to 50% in 2013, which it feels is sufficient to drive investment in new capacity addition.
Gartner estimates the wafer fab equipment (WFE) market to have declined by 17.4%, totaling $29.9 billion in 2012. It expects capacity utilization to decline into the low 80% range before slowly increasing to 85% towards the end of 2013. Though Gartner forecast the market size to decline to $27 billion this year, it believes the market will return to growth 2014 onward. 
Applied scored significant application wins in Q1 2013, witnessed strong demand for its transistor products and converted a number of existing positions into volume orders. The company strongly feels that it has the requisite capacity to build momentum for a higher market share in wafer fab equipment (WFE) in 2013.
Mobility Trend, Larger TV Sizes & 4-K Resolution Technology To Fuel Display Demand
Applied display segment orders grew by 66% in Q1 2013, on account of the ongoing mobility investments and the beginning of resurgence and TV equipment orders. Though its customers still remain cautious about the end demand, Applied believes that with the larger models in the TV industry reaching attractive prices and the introduction of new 4-K resolution technology, there could be a marginal increase in investment in display factories this year.
Additionally, with a higher number of touch enabled hybrid (notebook-tablet) models hitting the market, orders for equipment to manufacture touch panels and high performance mobile screens remain strong as production moves to larger substrate sizes.
We will update our price estimate of $13.50 for Applied Materials after the Q2 2013 earnings release.Notes:
- IDC Raises Its Worldwide Tablet Forecast on Continued Strong Demand and Forthcoming New Product Launches, IDC Press Release, September 19, 2012 [↩]
- Gartner Says Worldwide Wafer Fab Equipment Spending to Decline 9.7 Percent in 2013, Gartner Newsroom, December 18, 2012 [↩]