With a 12% sequential decline in orders during Q3 2013, Applied Materials (NASDAQ:AMAT) lost its growth momentum in the preceding two quarters. The decline was primarily on account of lower semiconductor demand which was partially offset by a strengthening display order book. Within the semiconductor segment, though Applied witnessed a seasonal decline in foundry bookings, it marked strong growth in orders for memory and logic.
The company believes that the slowdown in foundry investment by its customers is a short term trend as they focus on ramping production on the new capacity installed over the past two quarters, to meet higher demand during the holiday season. It anticipates investment levels to recover towards the end of the year.
Though declining PC sales might dampen logic investment for the year, Applied anticipates strong growth in foundry and higher spending in the memory market. With a robust pipeline of new products, the company believes that it is well positioned in both the markets and will see profitable growth in 2014 and beyond.
Improving Semiconductor Demand
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.  Though still not strong enough to turn around the market, the global chips demand is beginning to recover.
Applied predicts wafer fab equipment (WFE) spending for 2013 to be low, between $27-$30 billion, but estimates investment to rise by 10% to 20% in 2014 and reach $37 billion by 2016.  Intel (NASDAQ:INTC), TSMC and Samsung (PINK:SSNLF), who 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. 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.
Higher memory spend and the adoption of new technologies such as 3D NAND and FinFET (3D) transistors will help fuel growth in the semiconductor equipment market.
1. Rising adoption of FinFET (3D) transistors
In the recently held Citi Global Technology Conference, Applied declared that the FinFET technology adoption is the most attractive opportunity in foundry spending. It views the use of more advanced materials in FinFET production as an important growth driver. Intel has already adopted the technology and TSMC and Samsung have an aggresive roadmap to achieve the same, as devices using the FinFET technology are strong both in terms of power consumption and processing speed, important features for today’s computing devices.
Applied claims to be in a strong position to gain from the adoption of the FinFET technology as it has a high share in EPI tool, which is extensively used for the technology. The FinFET technology can increase Applied’s addressable market by around 35%. 
2. Improving DRAM demand
Within the DRAM space, the market conditions are improving with average selling prices recovering to levels last seen in 2010. Structural changes in the market along with rising bit demand for mobile applications are key factors driving growth in this segment. Applied claims that its DRAM customers are increasing their bit supplies and we can see some additional capacity being added next year as well, if market conditions remain favorable.
3. NAND is the strongest growth segment
The rising mobile shipments is driving demand for NAND flash memory with bit growth for 2013 expected to be in the 40%-50% range. In addition to the ongoing mobility trend, the transition to 3D NAND technology is driving demand for semiconductor equipment.
Applied expects investment for 3D NAND technology to accelerate in 2014 and 2015, as more manufacturers adopt this technology. The transition from plainer to 3D NAND is driven by deposition and etch, and as a result the company expects its available market to grow by about 25% for the first generation 3D NAND devices. It claims to have a clear and sustainable differentiation in the field and expects its market share to grow as 3D NAND factories ramp into volume production. Last month, Samsung started mass production of the industry’s first 3D vertical NAND flash memory.
Our price estimate of $15 for Applied Materials is almost in line with the current market price.Notes:
- Intel, TSMC And Samsung Are Driving Semiconductor Capital Spending In 2013, Seeking Alpha, May 20, 2013 [↩]
- Applied Material’s Management Presents at Citi Global Technology Conference – (Transcript), Seeking Alpha, September 4, 2013 [↩] [↩]