The Factors Behind Applied Material’s Massive Stock Rally This Year

by Trefis Team
Applied Materials
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Building on its strong growth momentum over the last few quarters, Applied Materials (NYSE:AMAT) reported record revenue and earnings throughout fiscal year 2017, which ended on October 29. Emerging technologies such as the Internet-of-Things (IoT) and artificial intelligence (AI) are driving strong growth in the semiconductor industry. Innovation and solid execution has enabled Applied to expand its presence and gain share, growing faster than the market. 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. This solid execution and optimistic outlook has driven a massive rally in the company’s stock, which has risen by around 65% since the beginning of the year, even after a recent pullback. Below we delve deeper into the factors that have boosted the company’s performance of late.

Shift To Advanced Technologies In Display

Applied Materials’ recent surge in Display revenues is being driven by large format TVs and increasing investments in OLED displays by its customers. Average screen sizes, for TVs as well as mobile devices, have increased over the years and demand continues to grow. Furthermore, the company is seeing a significant market opportunity in OLED display equipment, as its key customers are ramping up investments in the technology. Applied is building a strong product portfolio to support its customers’ transitions to OLED displays over the next few years. The uptick in display orders for Applied suggests that the segment can be a major revenue growth driver for the company in the future.

Higher, Less Volatile Spending On Wafer Fab Equipment 

The semiconductor market is growing and becoming more diverse and stable. Applied’s management expects Wafer Fab Equipment (WFE) spending for 2018 to be higher than 2017, and higher than previously projected. The company’s share in the WFE market increased by 2% in 2016, and management is confident that the strength of its product portfolio will lead to additional gains over the next few years. Applied has managed to increase its market share in logic, DRAM, and NAND over the last several years, and with a strong pipeline of orders it expects broad-based growth from these markets in the future.

Supported by significant developments in emerging technologies such as the Internet of Things (IoT), virtual reality, augmented reality, big data, artificial intelligence, and self-driving cars in recent years, Applied Materials has significant growth potential going forward. These areas have the potential to significantly increase semiconductor spending and drive further advances in silicon technology in the future.

We are in the process of revisiting our price estimate for Applied, which is now more than 25% below the market price following the stock’s rally.

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