Applied’s Growth Can Accelerate On Improving Semiconductor Demand

Applied Materials (NASDAQ:AMAT) witnessed its second consecutive year of negative growth in 2012 as most semiconductor manufacturers lowered their capital spending due to an uncertain macro outlook. However, on account of growing strength in its silicon systems group (SSG) and display segment, the company saw a 25% q-o-q increase in Q2 2013 revenue. Applied will announce its Q3 2013 earning on August 15, and we expect the growth momentum to continue in the quarter.

Booking 7% growth in orders last quarter, Applied claims to be witnessing healthy demand for semiconductor equipment with a steady increase in utilization at its customers’ factories. After a significant decline in its display business last year, it is seeing rising strength and investment in the market. The company is confident on building momentum towards profitable growth in subsequent quarters.

The accelerated changes in device technology and the adoption of new complex materials in the industry will accelerate the demand for semiconductor equipment.

See our complete analysis of Applied Materials here

Improving Semiconductor Demand

Applied reported a 33% sequential increase in its SSG revenues and a 14% increase in orders in Q2 2013. While higher foundry investment accounted for the majority of its revenues, the increase in orders was primarily driven by rising NAND demand and improving DRAM spending.

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, 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.

Gartner predicts the wafer fab equipment (WFE) market to decline by approximately 6% in 2013 but believes the market will return to strong growth in 2014. ^[2] Intel (NASDAQ:INTC), TSMC and Samsung (PINK:SSNLF), which account for roughly half of the total capital spending in the industry, have indicated strong capital investment plans for the current year with the aim to enhance their technological capabilities. ^[1] All of the above companies have been the top three customers for Applied for many years, and we do not foresee any reason for the trend to change.

Mobility Trend Remains The Biggest Growth Driver

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. ^[3]

With rapid innovation in the market, mobile devices drive demand for leading-edge foundry capacity, and thus the market leaders are aggressively accelerating ramps at advanced nodes. Applied announced in its last earnings call that the value of silicon being consumed by smartphones and tablets has surpassed that being used in PCs. It believes that mobile customers will account for approximately 45% of wafer fab spending in 2013.

Accelerating Growth Momentum In Display

In addition to the expanding mobile market, the beginning of resurgence and TV equipment orders is strengthening demand for Applied’s display equipment. Applied reported a 41% increase in orders last quarter and managed to remain profitable in its display business despite the worst downturn in the history of this market.

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 the 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. ^[3]

We will update our price estimate of $13.50 for Applied Materials after the Q3 2013 earnings release.

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

1. Intel, TSMC And Samsung Are Driving Semiconductor Capital Spending In 2013, Seeking Alpha, May 20, 2013 [↩] [↩]
2. Gartner Says Worldwide Semiconductor Manufacturing Equipment Spending to Decline 5.5 Percent in 2013, Gartner Press Release, June 20, 2013 [↩]
3. Applied Materials CEO Discusses F2Q 2013 Results – Earnings Call Transcript, Seeking Alpha, May 16, 2013 [↩] [↩]