Applied Materials Signs A Two-Year Service Contract With Global Foundries

by Trefis Team
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Applied Materials
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As one of the leading semiconductor fabrication equipment supplier, Applied Materials (NASDAQ:AMAT) revenues have taken a hit as the slowdown in the global semiconductor industry has lowered equipment spending of most manufacturers. Applied posted an outlook for a 25% to 40% decline in its net sales for Q4 2012, hinting at a further slowdown in spending in the current quarter. (Read: Applied Materials Q3 Results Hint At A Further Slowdown In Equipment Spending)

See our complete analysis of Applied Materials here

Apart from expenditure on purchasing manufacturing equipment, there is also an increasing focus, especially during a slowdown, on improving utilization and reducing the total cost of ownership of the material. We estimate the wafer fab equipment and Applied global services divisions to contribute close to 57% and 30% respectively to the company’s overall valuation.

While net sales for silicon systems group (SSG) was down 13% sequentially, the applied global services posted a marginal sequential increase in Q3 2012. However, owing to the economic slowdown, both the divisions registered lower orders last quarter, with the decline in SSG (41%) being much more prominent as compared to the global services division (18%).

Service Agreement With Global Foundries

Earlier last month, Applied announced an enhanced two year contract with Global Foundries, one of the world’s leading independent semiconductor foundry, to service all of Applied’s equipments at the latter’s fab in Dresden, Germany. Global Foundries is ramping up its worldwide capacity, including the build-out at the Dresden site into the largest manufacturing site in Europe.

The performance contract provides support to Global Foundries in optimizing technology ramps, increasing capacity, reducing scrap and improving overall factory output stability. We feel that as an increasing number of manufacturers look to cut costs and improve efficiencies in the current year, Applied could mark a marginal increase in its share of semiconductor capital expenditure.

Applied To Retain Its Foothold In Silicon Wafer Fab Equipment

The fact remains that Applied Materials remains a dominant player in semiconductor device manufacturing and we expect it to retain its foothold in the market for the rest of our review period. Thus, as the global economy stabilizes and demand picks up, the semiconductor manufacturers will add capacity and move to more sophisticated process nodes in the future. With major semiconductor manufacturers, such as Intel (NASDAQ:INTC), TSMC and Samsung, announcing plans to increase their capex in the near future, we expect Applied’s revenues to bounce back 2013 onwards. [1]

We have a price estimate of $14.99 for Applied Materials, which is at a premium of under 30% to the current market price.

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Weak market conditions in the second half of 2011 caused pullbacks in expansion plans throughout the industry, as manufacturers adjusted their production levels to match end-user demand. The condition is likely to persist in the first half of 2012. However, with stability in the economic condition and a rebound in the global PC market, we are likely to witness an increase in utilization levels to meet the growing demand. As the downward pressure on utilization rates ease, DRAM and foundry manufacturers will begin to increase spending.

Notes:
  1. 3 Fundamental Semiconductor Companies Worth Considering On A Pullback, Seeking Alpha, August 19, 2012 []
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