Applied Materials Growth To Remain On A Fast Moving Trajectory In Q2’15

Leading semiconductor equipment manufacturer, Applied Materials (NASDAQ:AMAT) is set to report its Q2 2015 earnings on May 14th. (Fiscal year ends with October.) The company saw 4% sequential and 8% year-to-year growth in its top line, driven by semiconductor and display demand. Orders of $2.3 billion were up 1% sequentially, with an increase in the Silicon Systems Group (SSG) and Energy and Environmental Solutions (EES)  offsetting a decline in the Applied Global Services (AGS) and Display segments.

In the last few quarters, Applied has focused on strengthening its R&D and field teams, while increasing investment in product development. The company has created a strong pipeline of new and differentiated products that should accelerate its growth when customers move new technologies into high-volume production. While the company admits that there are risks related to the timing of customer investments, it believes that 2015 will be a year of solid market growth, driven by robust memory spending in the first half and foundries ramping FinFET production in the second half.

For Q2 2015, Applied expects net sales to be flat to up a couple of points sequentially. SSG and AGS net sales are expected to be up by about 4% to 8% and 5% to 10%, respectively. Display and EES net sales are forecasted to be approximately $160 million and $75 million, respectively.

In Q2’15, Applied and Tokyo Electron called off their merger owing to regulatory objections. Applied Materials announced an agreement to buy Tokyo Electron in September 2013 in an all-stock deal valued at nearly $9.3 billion. In February 2014, Applied Materials announced that this strategic merger would result in the formation of a new company called Eteris. Since, the announcement of the scrapped deal, Applied’s share has fallen down approximately 8%. ^[1]

Our price estimate of $22 for Applied Materials is approximately at a 10% premium to the current market price. We will update our model after the Q2 2015 earnings release.

See our complete analysis of Applied Materials here

Semiconductor Business To Be Driven By Memory In The First Half Of 2015; Foundry To Be Higher In The Second Half Of The Year

Applied expects to benefit from the recent trends in semiconductor capital spending, given the increased capital intensity needed to further shrink integrated circuits to lower nodes (14nm and below). Foundries, integrated device manufacturers, and memory producers are faced with a growing demand, fueled by evolving trends in mobility, connectivity, video and wearable devices, that will be met by higher capital spending. Applied’s customers are focused on winning share through these inflection points and this is resulting in a period of sustained investment by semiconductor customers. According to Applied, Wafer Fab Equipment (WFE) spending for calendar 2014 was approximately 15% higher than 2013. The company believes the market could grow another 5% or more in calendar 2015.

Applied is making its largest gains in areas where the market is growing rapidly, including CVD and Etch. In calendar year 2014, memory spending drove the growth of the Etch and CVD markets at a higher rate than overall WFE, and the company believes it won at least 3 points of share in CVD and 5 points of share in conductor etch. Applied claims that its combined Etch and CVD businesses grew more than 50% in calendar 2014, which is 1.5 times the rate of the Etch and CVD markets and over 2 times the rate of its largest competitor in these segments.

New wins in the memory market combined with its traction in the foundry market, helped Applied deliver its highest Etch quarterly revenues in orders since 2007, in Q1 2015. The company’s latest generation Etch system has one of the fastest adoption rates of any new Applied product in recent years. Applied shipped three times more chambers in Q1 2015 as compared to Q4 2014, and expects to double shipment volumes again in Q2’15.

In foundry, Applied expects investment to be maintained at the same healthy levels seen in 2014, with the potential to be slightly higher than last year. Its current view is that spending on advanced nodes will be heavily biased towards the second half of the year. In Q1 2015, Applied’s memory orders were higher than the foundry and logic orders for the first time in 5 years, and it expects to see a similar mix in the current quarter.

Display To Remain Gloomy In The Short Term, Though Long-Term Growth Potential Remain Strong

For fiscal 2014, Applied’s display orders achieved a six-year high as the business took advantage of technology inflections and panel size increases in the TV and mobile display markets. Display net sales of $275 million were up 45% in Q1 2015 (highest revenue in the past three years), as customers began to ramp the new TV capacity put in place over the last six to nine months. However, Applied’s display orders declined to $107 million in Q1 2015, and the company expects the booking pattern to remain lumpy in the near term. Nevertheless, the company believes that the growing TV demand and mobile investments will drive long-term growth in the display segment. Applied claims that its display business is shaping up as expected, driven by strong investment in capacity additions and new technology.

The average TV sizes are growing faster than historic rates, and Applied is seeing a surge in unit sales fueled by consumer spending on new 4K and OLED models. Demand for bigger, higher resolution, low-power screens for mobile applications are also a key factor driving display growth. The supply in TV and mobile remain tight  and customers continue to invest in new capacity and advanced technology.

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1. Applied Materials Calls Off Its Merger With Tokyo Electron, Forbes, April 27th, 2015 [↩]