Here Is Why We Believe That Applied Materials Is Worth $22

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AMAT: Applied Materials logo
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Applied Materials

Applied Materials (NASDAQ:AMAT) stock price has been on a downhill trajectory since the company called off its Tokyo Electron deal, losing almost 17% of its value in the last two months alone. Key factors behind the weak investor sentiment include: 1) weaker-than-expected growth; 2) unpredictable near-term demand for nanomanufacturing equipment;  and, 3) Applied’s lumpy Display segment. Despite the short-term weakness, Applied remains a fundamentally strong company, in our view. The company’s growing focus on its core business and accelerating 3D NAND product cycle offer it strong, long-term growth potential. We will explain these factors in detail below.

See our complete analysis of Applied Materials here

Applied To Benefit From Major Inflections, Like FinFET And 3D NAND In Semiconductors 

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The semiconductor industry is rapidly moving towards the adoption of 3D NAND and FinFET technologies, and Applied Materials is working hard the develop the equipment that will enable them. Applied Materials’ innovations in these emerging arenas should help drive the company’s growth over the next few years. Given the promising nature of such technologies, Applied Materials will work hard to extend the market position of its broad equipment portfolio. As Moore’s law slows its advance towards what many feel may be a theoretical limit, newer technologies like 3D NAND and FinFET offer a way forward.

By increasing investment in key areas, Applied claims to have created a pipeline of differentiated products that will accelerate company’s growth. Major inflections, like FinFET and 3D NAND in semiconductors and OLEDs in new displays, represent unprecedented technology advances that are enabled by materials innovation. Applied notes that the industry is still in the early stages of these inflections and as they play out over the next several years, they create great, long-term growth opportunities for the company. Management believes that its unique position in precision materials engineering will help it outgrow the industry in the future.

Applied is making its largest gains in areas where the market is growing rapidly, including CVD and Etch. The company’s combined revenue in CVD and Etch was up 50% year over year, significantly outgrowing the market. The company has highly differentiated products in its pipeline that will expand Applied’s addressable market. Applied has shown one of the fastest rates of adoption for one of its products, for which the installed base for the latest generation etch system has grown from 10 chambers to more than 160 in the past two quarters. It believes that its technical position is getting stronger, and this provides a foundation for future share gains.

With its foundry partner, Applied is engaged in a fierce battle to ramp FinFET technology by accelerating volume production and creating strong growth opportunity over the next few years. Applied is confident about its strong footprint in foundry with highly differentiated products.

Applied Stands On The Forefront Of Its Rather Small But Promising Business Division

Applied Materials’ flat panel display and solar PV business segments are also doing well. Although its solar PV business is relatively small, it may actually grow the fastest out of all its business. As the leading equipment provider for solar PV companies, Applied Materials should experience some serious growth in its solar PV segment. Solar PV is currently one of the fastest growing industries, and still has a tremendous amount of momentum going for it. With Applied Materials’ major business segments also expected to outperform, the company’s future looks bright.

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. The company recently received a large order for its OLED encapsulation tool, and in 2015 Applied expect to book about $200 million in this new application. The supply in TVs and mobile devices remains tight, and customers continue to invest in new capacity and advanced technology.

Applied’s display business was the first one to fully deploy its product development engine best practices and received internal funding to capture share in CVD, PVD and new products based on large area precision materials engineering.

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