Applied’s Equipment Demand Will Gain On Higher Spending By Key Tech Players

Applied Materials (NASDAQ:AMAT), the leading semiconductor equipment manufacturer, witnessed a continuous decline in its top line last year as most semiconductor manufacturers lowered their capital spending. An uncertain macro environment combined with soft demand for consumer devices forced many chip manufacturers to reduce or postpone their expansion plans. Global semiconductor capital equipment spending declined by 16.1% annually, reaching $37.8 billion in 2012. ^[1]

The semiconductor market slowed down in the latter part of 2012 with capacity utilization declining to 81.2% and 79.2% in Q3 2012 and Q4 2012 respectively. However, the situation seems to be improving with industry utilization rising to an estimated 80.5% and 82.5% in Q1  2013 and Q2 2013 respectively. ^[2] We believe the situation will continue to improve throughout the year.

Though still not strong enough to turn around the market, the global chips demand is beginning to recover. Rising mobile shipments, a recovering DRAM market, growing NAND demand and the rapidly changing technological development are key factors driving demand for semiconductor equipment.

Gartner predicts the wafer fab equipment (WFE) market to decline by 11% in 2013 but believes the market will return to growth 2014 onward. ^[3] While most players still remain cautious about increasing spending this year, some key vendors plan to continue investing for future growth. We believe that the demand for Applied’s equipment will strengthen throughout 2013.

See our complete analysis of Applied Materials here

Increasing Capital Spending By Key Manufacturers This Year To Spur Demand

Intel (NASDAQ:INTC), TSMC and Samsung (PINK:SSNLF) are some of the biggest chip manufacturers in the semiconductor market. The three companies combined account for roughly half of the total capital spending in the industry. ^[2] While most other chip makers maintain a cautious industry outlook this year, the three companies have indicated strong capital investment plans for 2013 with an aim to enhance their technological capabilities.

Source: EE Times

Intel is in the process of transitioning from 300-millimeter to 450-millimeter wafers in a few years and is also investing in building its next-generation 14 nm manufacturing process. Though the company’s growth rate has slowed down on account of persistent weakness in the PC market, Intel intends to step up its investment to drive long-term growth by maintaining its technology lead over other players in the market.

TSMC is the world’s first dedicated semiconductor foundry. The rising demand for smartphones and tablets has benefited TSMC as it has an industry-leading semiconductor fabrication technology which is outsourced by major mobile chips manufacturers such as Qualcomm (NASDAQ:QCOM). TSMC is expanding its 28 nm capacity and is in the process of ramping up its 20 nm process towards the end of this year.

Samsung has become cautious about its investment. The company is currently the only foundry supplier for Apple and faces an increasing threat of losing some of the business due to growing competition between the two companies in the mobile market. Nevertheless, Samsung is expected to account for a significant portion of total semiconductor capital spending in 2013.

Applied To Retain Market Share In The Semiconductor Equipment Market

Applied’s semiconductor manufacturing systems are used by integrated device manufacturers and foundries to build and package memory, logic and other types of chips. It was the No.1 semiconductor equipment supplier for 19 consecutive years before being replaced by leading lithography vendor ASML Holdings in 2011 on account of strong sales of lithography equipment during the year. However, Applied with a 14.4% share regained its position as the top semiconductor equipment manufacturer in 2012. ^[4]

Samsung, Intel and TSMC have been the top three customers for Applied for many years, and we do not foresee any reason for the trend to change.

Source: Applied Materials Annual SEC Filings

Semiconductor equipment manufacturing is a complex and highly capital intensive industry, and the threat from smaller and niche players remains unsubstantial. The share of the top 10 equipment vendors increased from 61% in 2008 to 70% in 2012, highlighting the increasing market dependence on a few leading vendors in the industry. ^[5]

On account of its broad product portfolio and global reach, Applied has been one of the leading global semiconductor equipment providers for almost two decades. Last quarter, it witnessed strong demand for its transistor products and converted a number of existing positions into volume orders. Applied marked an 80% and 14% increase in semiconductor orders in the last two quarters respectively. 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. With a leading product portfolio and sustained investment in R&D, we believe that Applied can retain its market share over our review period.

Our price estimate of $13.50 for Applied Materials is at a discount of over 10% to the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Applied Materials back on top in chip equipment, EE Times, April 22, 2013 [↩]
2. Intel, TSMC And Samsung Are Driving Semiconductor Capital Spending In 2013, Seeking Alpha, May 20, 2013 [↩] [↩]
3. Gartner Says Worldwide Wafer Fab Equipment Spending to Decline 9.7 Percent in 2013, Gartner Newsroom, December 18, 2012 [↩]
4. Worldwide Semiconductor Manufacturing Equipment Spending Declined 16 Percent in 2012, According to Final Results by Gartner, Gartner Newsroom, April 22, 2013 [↩]
5. Semiconductor tool spending drops 16% in 2012, Market Watch, April 22, 2013 [↩]