Applied Materials Earnings Preview: Rising Display, Semiconductor Demand To Drive Growth

-20.74%
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AMAT: Applied Materials logo
AMAT
Applied Materials

2013 was a transformative year for leading semiconductor equipment manufacturer Applied Materials (NASDAQ:AMAT) as it reduced its overhead expenses and stepped up investment in product development. The company believes that its growth momentum will continue throughout 2014, backed by stronger investment from its semiconductor and display customers. It generated orders of $2.2 billion (9% growth) and $2.63 billion (15% growth) in Q1 2014 and Q2 2014, respectively. Applied started its fiscal 2014 on a strong note with 39% and 19% annual growth in revenues in Q1 2014 and Q2 2014, respectively. It is set to report its Q3 2014 earnings on August 14, and we expect the company to report another quarter of strong growth.

Evolving trends in mobility and connectivity are driving industry growth and accelerating innovation in mobile chips, solid state storage and interactive displays. In semiconductor and display, new materials innovations are enabling key inflections by providing customers with solutions that improve device performance, yield and cost. Applied anticipates healthy investment levels by its semiconductor and display customers in the year ahead, and believes that the major technology trends will play to its strength in precision materials engineering.

The company expects to complete its merger with Tokyo Electron in the second half of the year. The combined entity, estimated to be worth $29 billion, puts Applied in a stronger position to benefit from the improving semiconductor demand.

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Our price estimate of $19 for Applied Materials is at a marginal discount to the current market price. We will update our valuation after the Q3 2014 earnings release.

See our complete analysis of Applied Materials here

Merger With Tokyo Electron To Help Form A Stronger Entity

Applied announced its merger with Tokyo Electron in an all-stock deal valued at more than $7 billion in September last year. Last month, the two companies unveiled the new name and logo of the combined entity which will be used after the merger. Built on the strong legacies of Applied and Tokyo Electron, the name of the merged company — Eteris — is derived from the concept of eternal innovation for society. With a new name, mission and vision, Applied and Tokyo Electron intend to move quickly and begin to create value as soon as the merger closes.

Both Applied and Tokyo Electron supply equipment used to manufacture semiconductors, flat-panel displays and solar photovoltaic products. U.S.-based Applied Materials is the world’s largest maker of semiconductor equipment by sales, followed by ASML Holding NV and Tokyo Electron. [1] After the close, Applied Materials and Tokyo Electron shareholders will own approximately 68% and 32% of the new company, respectively.

With an estimated combined WFE market share of 34%, Applied believes that its merger with Tokyo Electron will help form a stronger entity. Though both companies are among the largest in the industry, they have little overlap in their product offerings. Applied will also benefit from a broader product portfolio, shared R&D costs and lower cost of developing chips.

Improving Semiconductor Demand In 2014

An uncertain macro environment last year 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 and research firm Gartner estimates the same to have declined further (by 8.5%) in 2013. [2]

However, the accelerated changes in device technology and the adoption of new materials in the industry are expected to re-accelerate demand for semiconductor equipment in the next two years. Gartner estimates capital equipment spending in the semiconductor industry will increase by 16% and 17% in 2014 and 2015, respectively. Rising mobile shipments, a recovering DRAM market, growing NAND demand and the pending technology transitions (22nm and 16 nm, FinFET, and 3D NAND) are key factors driving demand for semiconductor equipment.

Applied remains focused on creating a strong pipeline of new, highly differentiated products to enable future inflections in logic, memory and display. In calendar 2013, it gained 1.4 points of wafer fab equipment market share, ending the year at its highest level since 2006. [3]

TV And Mobile Investment To Drive Display Demand

Though Applied expects its display revenue pattern to be uneven due to shipment timings, its overall outlook for the display segment remains positive. Growing TV demand and mobile investments are two key factors driving growth in the display segment. The company booked new orders worth $340 million in Q2 2014, compared to $79 million in Q1 2014 and $195 million in Q2 2013.

Growing global TV sales and larger average TV sizes are increasing significantly faster than historical trends and are driving demand for display equipment. Applied claims that the average TV size is growing 1.2 to 2 inches annually, which is significantly higher than historical norms. This trend is driving area growth in the 15% range which the company believes is sufficient to support investment in three new Gen 8.5 factories, which are being built in China as its customers compete to meet the growing TV demand.

In  mobile devices, the screen resolution is becoming an important differentiator and is leading to significant growth in high definition screens. Applied expects multiple Gen 6 LTPS factories to be built in the next 12 to 18 months to support this demand. High definition screens are driving demand for low temperature polysilicon backplanes The company expects multiple new Gen 6 factories to be built in the next two years to meet the growing market demand.

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Notes:
  1. RPT-UPDATE 2- Applied Materials to buy Tokyo Electron, create $29 bln company, Reuters, September 24, 2013 []
  2. Gartner Says Worldwide Semiconductor Manufacturing Equipment Spending to Decline 8.5 Percent in 2013 , September 19, 2013 []
  3. Applied Materials’ (AMAT) CEO Gary Dickerson on F2Q 2014 Results – Earnings Call Transcript, Seeking Alpha, May 16, 2014 []