- Silicon Wafer Fab Equipment constitutes 67% of the Trefis price estimate for Applied Materials's stock.
- Applied Global Services constitute 29% of the Trefis price estimate for Applied Materials's stock.
WHAT HAS CHANGED?
Q3 2022 Earnings
Applied Materials reported net sales of $6.52 billion in Q3 '22, up from $6.2 billion in Q3 '21. However, a much faster rise in COGS and operating expenses saw operating income dwindle from $2.01 billion to $1.92 billion over this period. Combined with a roughly unchanged effective tax rate, net income dropped to $1.61 billion from $1.72 billion, driving EPS down to $1.86 from $1.89.
Applied Materials provides manufacturing equipment, services, and software to manufacturers of semiconductor wafers and chips, flat panel liquid crystal displays (LCDs), solar PV cells and modules, and other electronic devices.
Applied Materials is the world’s largest semiconductor fabrication equipment supplier based on revenue. It is also a leading supplier of LCD fabrication equipment to the flat panel display industry and is the leading supplier of solar PV manufacturing systems to the solar industry, based on revenue.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Silicon wafer fab equipment
- Silicon Systems Revenue: We forecast that Applied's Silicon Systems Revenue will grow to about $35 billion by the end of our review period. Applied’s confidence is continuing to gain market share in WFE is supported by its three major customers in the segment. These three customers accounted for approximately 50% of net sales for the company in the past few years. A decline in business from any one of these customers could be a great setback for Applied and could lead to a major fall in the company’s SSG market share and overall revenues. For instance, if revenues remain flat at levels of about $16 billion by the end of our review period, our price estimate for the company could decline by almost 20%.
SOURCES OF VALUE
Applied operates in three reportable segments: Silicon Wafer Fab Equipment Group, Applied Global Services, and Display. The company stopped treating Solar PV as a reportable segment in October 2016.
Silicon Wafer Fab Equipment Group
The Silicon Wafer Fab Equipment segment continues to be the most valuable segment for Applied, generating around 70% of revenues in 2021. Applied is the market leader in manufacturing equipment for silicon-based semiconductor products, and we expect it to retain its leadership due to its superior product portfolio and continued investment in research and development.
Applied Global Services
Applied's offerings in services, particularly those related to yield management and improvements in 200mm manufacturing equipment business, earned it significant growth. With revenue of over $5 billion in 2021, it comprises 22% of its overall revenues. We expect the demand for Applied's services in fab management and automation to remain strong during our forecast period, as the semiconductor manufacturing process gets more complex and better automation and management services start affecting the yield of semiconductor manufacturers.
Display segment, which offers products for manufacturing LCDs, OLEDs, and other display technologies for TVs, PCs, and mobile devices, is the third largest segment of the company. With revenue of over $1.6 billion in 2021, the segment contributed about 8% of revenues. Applied Materials’ recent surge in Display revenues is being driven by large format TVs and increasing investments in OLED displays by its customers. We expect the demand for products required in the manufacturing of OLED displays to remain strong during our forecast period. Furthermore, it is estimated that 80% of the new smartphones will have OLED display by the end of 2024, which bode well for the business. The uptick in display orders for Applied suggests that the segment can be a major revenue growth driver for the company in the future.
Technology Transitions To Drive Higher Levels of Investment In The Future.
Applied believes that the semiconductor industry growth is fueled by evolving trends in mobility, connectivity, video and wearable devices. This is accelerating innovations in mobile processors, solid-state storage and interactive displays. Areas such as A.I. and Big Data are also expected to be big drivers of growth over the next decade and semiconductors are likely to be the foundation of these technologies. Applied's customers are focused on winning share through these inflection points and this will result in a period of sustained investment by semiconductor customers. The company's key customers are aggressively pursuing 7nm and 10 nm process technologies.
Changing Trend In Semiconductor Spending
While smartphones were the biggest driver of semiconductor spending in recent years, emerging technologies such as the Internet of Things (IoT), virtual reality, augmented reality, 5G networks, big data, artificial intelligence, and self-driving cars are projected to drive growth going forward. Applied says that these areas have the potential to significantly increase semiconductor spending and drive the advances in silicon technology in the future. The company also believes that capital equipment spending has become less cyclical and more normalized over time, because of increasing demand in these areas.
Growing TV demand and mobile investments will drive long-term growth in the display segment
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 is also a key factor driving display growth. According to the company, large format TVs are expected to grow at a rate of 50%, compared to the single-digit growth of TV’s overall. The supply in TV and mobile remain tight, and customers continue to invest in new capacity and advanced technology, to gain a leadership position in the market. This presents a significant market opportunity for Applied in the OLED display equipment. Applied is building a strong product portfolio to support its customers in their transition to OLED displays over the next few years. The uptick in display orders for Applied suggests that this segment can be a major revenue growth driver for the company going forward.