Why We Revised Our Price Estimate For Applied Materials to $32?

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AMAT: Applied Materials logo
AMAT
Applied Materials

We recently increased our price estimate for Applied Materials (NYSE:AMAT) by approximately 67%, to $32. Our revised price estimate our belief that the company will manage to increase market share by a wider margin than we previously believed in both the semiconductor equipment and display equipment markets.  We base this on  the strong surge in orders Applied has reported in the last two quarters into consideration.  This surge, in turn, reflects s hefty uptick in customers’ capital expenditures on new equipment required for leading technologies wafer fabrication facilities.

Given the breadth with which it targets its markets, Applied should be able to improve its market share with the adoption of these technologies. The company’s revenue figures surpassed the consensus estimates in the last two quarters, driven by the strong display and silicon system sales. It is worth noting that Applied booked orders worth $3.7 billion in Q3, which is highest in any given quarter in the last 15 years. This should translate into strong sales growth for the company in the coming quarters. Keeping the market size forecasts unchanged, an upward revision in market share for Applied should result in higher revenues for the company going ahead.

The growth in the orders in Applied’s silicon systems segment is being driven by the surge of investment in manufacturing capacity by its customers. The company’s leading customers are aggressively pursuing 7nm and 10 nm process technologies, which is providing a key source of equipment demand for the company. Capacity additions on core geometries (22nm and 14nm) are strong as well. Further, the company is seeing strong demand from its key customers that are upgrading their manufacturing capacity to satisfy an anticipated strong demand for 3D NAND Flash memory products and OLED display upgrade. Apart from these operational factors, a decline in the number of shares outstanding and an improvement in Applied’s cash position in Q3’16 also contributed to an upward revision in our stock price estimate for the company. 

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In the table below we present the key metrics that we revised for the company, which resulted in a higher estimate for Applied’s stock price than our previous estimates:

AMAT_Price_Revision

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