Applied Materials: Healthy Foundry Spending and Increased Adoption Of 3D NAND Can Drive Future Growth

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AMAT: Applied Materials logo
AMAT
Applied Materials

Applied Materials (NASDAQ:AMAT) reported its Q4 2015 earnings on November 12th  with the AGS (Applied Group Services) orders setting an all-time record and the display segment orders growing 50% year over year.  (Fiscal years end with October.)  However, overall revenues came in at the lower end of the expectations as  WFE (Wafer Fab Equipment) spending remained sluggish due to lower-than-expected sales of 200 mm equipment. During the entire year, weak foundry spending weighed heavily on the semiconductor tool division, but Applied sees significant revenue and gross margin improvement opportunities for fiscal 2016. The company believes that higher foundry spending, increased adoption of 3D NAND, strong TV demand in display and reduction in material costs can reinforce its topline and bottomline growth.

At $2.37 billion, Applied’s net sales for the fourth quarter increased 5% year over year, but declined 5% sequentially. The company’s Non-GAAP gross margin stood at 42.2% (above expectations) and the operating expenses were at $456 million(at the lower end of its guidance), producing a non-GAAP operating margin of 19.3%. The non-GAAP diluted EPS was inline with Applied’s guidance at $0.29.

Our $19 price estimate for Applied Materials is at an approximate 20% premium to the current market price. However, we are in the process of updating our model in light of the recent earnings release.

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See our complete analysis of Applied Materials here

Major Technology Inflections And Healthy Demand In Foundry To Drive Future Growth

In fiscal 2015, foundry spending was lower-than-expected due to sluggish economic growth and it impact on demand for electronic equipment, in particular, Smartphones.  This forced Applied’s customers to cut planned spending and optimize usage of existing capacity. Despite these headwinds, the company managed to maintain its profitability by gaining share in the 3D NAND transition and DRAM domains by five percentage points each. In fact, in fiscal 2015, NAND’s share of total WFE spending stood at 24%, which was some way ahead the past three year (2012-2014) average of 18%.

The company is poised to benefit in fiscal 2016, as it expects foundry spending to pick up in the second half of the year and major memory customers to ramp up 3D NAND technology into volume production. Applied reports that its leading customers are aggressively pursuing 10 nm technologies, which should provide a key source of equipment demand in 2016. Apart from WFE, the company expects to benefit from the changes in technology that will occur in the display segment in fiscal 2016. Applied projects its display revenues to grow by 15% in the ongoing fiscal year.

Applied’s focus on technology inflections and new products create strong revenue and market share growth opportunities from a long term perspective. The industry is still in the early stages of these inflections and as they play out over the next several years, they can strongly complement the company’s growth.

Q1 2016 Outlook

Applied expects its net sales to decline by 2 to 9 percent sequentially and non-gaap adjusted diluted EPS to be in the range of $0.23 to $0.27.

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