Applied Materials: Revenues Likely Declined In Q4 Due To Weaker Silicon Equipment Spending

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AMAT: Applied Materials logo
AMAT
Applied Materials

Leading semiconductor equipment manufacturer, Applied Materials (NASDAQ:AMAT) is scheduled to report its Q1 fiscal 2016 earnings on February 18th. (Fiscal years end with October.) The overall sales for Applied likely declined in Q4, primarily due to weakness in the silicon equipment sales that constitute a major portion of the revenues for the company. According to reports, weakness in semiconductor capital spending is likely to prevail in 2016. However, Applied sees significant revenue and gross margin improvement opportunities in the second half of 2016. In addition, the company believes that higher foundry spending, increased adoption of 3D NAND, strong TV demand in display and the reduction in material costs can reinforce its top-line and bottom-line growth during the year.

Our $19 price estimate for Applied Materials is at an approximate 20% premium to the current market price.

See our complete analysis of Applied Materials here

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Semiconductor Equipment Spending Will Likely Remain Weak In 2016

In fiscal 2015, foundry spending was lower than expected due to sluggish economic growth and its impact on the demand for electronic equipment, in particular, Smartphones. This forced Applied’s customers to cut planned spending and optimize usage of existing capacity. We believe that weak demand for electronic equipment may well persist throughout 2016, owing to a slowdown in the consumer electronic device sales. A report from the Consumer Technology Association (CTA) of the U.S, which forecasts a two percent drop in global consumer electronics spending in 2016, further supports our point.

Additionally, according to Gartner, the semiconductor equipment market might have entered a down cycle in 2016, due to a mismatch between supply and demand in the DRAM segment. Further, the report also expects a decline in wafer level manufacturing and semiconductor capital spending on the backdrop of sluggish electronics demand. The aforementioned factors will weigh heavy on Applied Materials’ growth in 2016.

Major Technology Inflections To Drive Future Growth

Despite a slow growth forecast in semiconductor equipment spending in 2016, Applied can manage to maintain its profitability in the year by gaining share with the transition to 3D NAND. The company will benefit as its major memory customers plan to ramp up 3D NAND technology into volume production. Further, Applied reported that its leading customers are aggressively pursuing 10 nm process technologies, which should provide a key source of equipment demand in 2016. In addition, the company will likely benefit from the changes in technology 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.

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