A Closer Look At Applied Materials’ Performance In 2017

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. Its phenomenal performance has been reflected in its stock price, which has surged by approximately 60% since the beginning of 2017, outperforming the 41% and 38% gains posted by the PHLX Semiconductor Index (SOX) and Dow Jones U.S. Semiconductor Index, respectively, during the same period. 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.

During the year, the company saw strong growth in both its Semiconductor and Display segments. Further, Applied’s operating margins improved by 6.7 percentage points during the quarter, because of a surge in its revenues and controlled expenses. Driven by multi-year inflections and new demand drivers, the company’s orders and earnings in fiscal 2017 were at an all-time high.

Inflections In Mobile & Screen Technology 

Applied has booked nearly $2 billion of orders in the Display segment. Its 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.As the technology and manufacturing become more complex, the company is confident that it is in a unique position to drive growth. Below are some key factors that will drive growth in the display market:

• Demand for large format TVs: The average screen size, be it for TV or mobile, has increased over the years and demand continues to grow. As Applied’s customers optimize factories for these bigger screen sizes, they are investing in new Gen 10.5 capacity, which on average require significantly more 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 this growth. The company has established the leading position in thin-film encapsulation, which enables OLED smartphones.

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 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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