Here’s Why Applied Can Show Solid Top-line Growth This Year

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AMAT: Applied Materials logo
AMAT
Applied Materials

Quick Take

  • With an improving macro environment, accelerated changes in device technology and the adoption of new materials in the industry, Applied can see accelerated demand for its equipment this year.
  • Weak market conditions in 2012 caused pullbacks in expansion plans throughout the semiconductor industry. However, the 80% and 14% increase in Applied’s Q1 and Q2 2013 semiconductor orders, respectively, are proof that the market is recovering.
  • While most other chip makers maintain a cautious industry outlook this year, Intel, TSMC and Samsung have indicated strong capital investment plans.
  • The three companies have been the top three customers for Applied for many years, and we do not foresee any reason for the trend to change.
  • After a significant decline in its display business last year, Applied is seeing rising strength and investment in the market. Applied believes that it has the potential to double its orders this year to over $800 million.
  • Rising demand from emerging economies, new 4-K resolution technology and increasing proportion of 50 inch and larger models at affordable prices are key factors driving growth in the global TV market.

Applied Materials (NASDAQ:AMAT), the leading semiconductor equipment manufacturer, marked its second consecutive year of negative growth in 2012 as most semiconductor manufacturers lowered their capital spending due to the uncertain macro outlook. Nevertheless, despite a sharp decline in semiconductor equipment spending, Applied regained its position as the top semiconductor equipment manufacturer in 2012. 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.

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Applied’s stock price has risen by over 30% so far this year. Though we remain optimistic on the company’s long term prospects, our price estimate of $13.50 for the company is at a slight discount to the current market price as we believe that we have adequately accounted for the growth in our model.

With an improving macro environment, accelerated changes in device technology and the adoption of new materials in the industry, Applied can see accelerated demand for its equipment going forward. Here are some of the reasons that support our belief that the company will show positive top line growth this year.

See our complete analysis of Applied Materials here

1. Improving Wafer Fab Equipment Market

Weak market conditions in 2012 caused pullbacks in expansion plans throughout the semiconductor industry as manufacturers adjusted their production levels to match the end-user demand. However, the 80% and 14% increase in Applied’s Q1 and Q2 2013 semiconductor orders, respectively, instills hope that the situation will improve this year. Applied claims to be witnessing healthy demand for semiconductor equipment with a steady increase in utilization at its customers’ factories.

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 industry utilization improved to an estimated 80.5% and 82.5% in Q1  2013 and Q2 2013 respectively. [1] 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. The ongoing mobility trend remains the biggest growth driver for the semiconductor industry. According to Applied, 200 million smartphones and 35 million tablets were shipped in the first three months of the calendar year 2013. It believes that the market is in line to achieve the expected annual growth of 35% and 55% for phones and tablets, respectively, in 2013. [2]

Additionally, foundries continue to add capacity at 28 nm, prepare to begin 20 nm pilot production at the end of this year and accelerate the development of 3D transistors. Applied claims that its strongest position is in foundries and as the foundries focus on developing new transistor technologies, it places the company in a strong position to increase its share with its leadership in transistor modules.

2. Applied to benefit from higher spending by key players

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] 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. [1] 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.

(In USD Billion)

2010

2011

2012

2013 (E)

Samsung

10.9

11.8

12.3

12.0

TSMC

5.9

7.3

8.3

9.0

Intel

5.2

10.8

11.0

12.0

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. Thus, we believe that the demand for Applied’s equipment will strengthen throughout 2013.

3. Building growth momentum in display

After a significant decline in its display business last year, Applied is seeing rising strength and investment in the market. The company is confident on building momentum towards profitable growth this year.

Applied has seen growing strength in its display business on account of ongoing mobility investments and the beginning of resurgence and TV equipment orders. The company has managed to remain profitable in its display business despite the worst downturn in the history of this market, and managed to more than double its display segment operating margins last quarter.

Applied has invested in a new TV fab in China and has secured 100% of the CVD and PVD business for the new factory. It already has a strong foothold in the CVD market and claims to be increasing its share in the display PVD market as well. It saw its share increasing in multiple product lines in Q2 2013 as the improving market conditions enabled its customers to add on to their capacity.

Rising demand from emerging economies, new 4-K resolution technology and increasing proportion of 50 inch and larger models at affordable prices are key factors driving growth in the global TV market. Applied believes that it has the potential to double its orders this year to over $800 million.

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

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Notes:
  1. Intel, TSMC And Samsung Are Driving Semiconductor Capital Spending In 2013, Seeking Alpha, May 20, 2013 [] []
  2. Applied Materials CEO Discusses F2Q 2013 Results – Earnings Call Transcript, Seeking Alpha, May 16, 2013 []
  3. Gartner Says Worldwide Wafer Fab Equipment Spending to Decline 9.7 Percent in 2013, Gartner Newsroom, December 18, 2012 []