Large Investments In Semiconductor & Display Technology Will Continue to Spur Applied Materials’ Growth: Q2’17 Earnings Review

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Applied Materials

Building on its strong growth momentum since the last few quarters, Applied Materials (NYSE:AMAT) reported record revenue and earnings for Q2 2017. Not only did the company beat analyst guidance for Q2 2017, but its outlook for Q3 2017 was significantly higher than market expectations. Emerging new technologies, like the Internet-of-Things (IoT), big data, and artificial intelligence, are driving strong growth in the industry. Innovation and solid execution has enabled Applied to grow faster than the market by expanding its served opportunity and gaining share. As its customers continue to make large investments to advance semiconductor and display technology, Applied’s growth momentum is likely to continue in the near future.

For 2017, Applied expects its top line growth, gross margin performance, and disciplined R&D investment to generate the highest non-GAAP operating margin of the past 17 years and free cash flow of 20% or more.

See our complete analysis for Applied Materials

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AMAT 1905

Wafer Fab Equipment (WFE) Spending Expected To Be Higher & Less Volatile For The Foreseeable Future

The semiconductor market is growing and becoming more diverse and stable. Sales of memory chips are at record levels and foundry is seeing an acceleration of investment, both at the leading edge and in trailing geometries. Applied claims that WFE spending for calendar year 2017 could be up about 15% relative to 2016, and estimates the figure to be close to $40 billion for the year. The company’s share in the WFE market increased by 2% in 2016 and it is confident that the strength of its product portfolio will lead to additional gains over the next few years. [1]

Applied has managed to increase its market share in logic, DRAM, and NAND over the last several years and is currently the leading equipment company for all these markets. The company has a strong pipeline of orders and expects broad-based growth from these markets in the future.

  • In 2017, Applied expects investment in new leading edge capacity to make up about 60% of total foundry spending, driven by increasing demand for more sophisticated smartphone processors as well as customers positioning to win the major inflections in high-performance computing and data centers.
  • Sales of memory chips are being fueled by increasing content in smartphones to support better cameras and VR applications as well as the need for more and higher performance storage in data centers. Applied estimates double-digit growth in DRAM spending this year and a much stronger growth in NAND.

Large Inflections In Mobile & Screen Technology Will Continue To Strengthen The Display Market

Applied is on track to book more than $2 billion of orders in Display. As the technology and manufacturing becomes more complex, the company is confident that it is in a unique position to leverage growth. Key factors that will drive growth in the display market are:

  • Demand for large format TVs: The average TV sizes are expected to reach 44.5 inches in 2017, up 5 inches in the past 3 years. As customers optimize factories for these bigger screen sizes, they are investing in new Gen 10.5 capacity, which on average require significantly higher investment compared to a Gen 8.5 factory.
  • Increasing investment in mobile OLED: Estimates indicate that two-thirds of new smartphones could have OLED displays by 2021 and screen manufacturers are accelerating their investment plans to support the growth. [1]

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Notes:
  1. Applied Material’s Earnings Call Transcript, Seeking Alpha, May 18th, 2017 [] []