Why Applied Materials’ Display Revenues Are Projected To Fall Sharply This Year

Applied Materials (NYSE:AMAT), one of the largest producers of semiconductor fabrication equipment, remains cautious about its outlook for 2019, on account of weaker capital spending by the memory and display industry. The display segment, in particular, is likely to see a sharp decline, with Applied forecasting that revenues for the segment could fall by about a third from the roughly $2.5 billion levels it posted in 2018. In this note, we take a look at some of the key trends that are likely to impact the display business in the near-term.

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Delayed Investments In TV Panel Space

Applied’s display business has been posting record growth levels, with revenues growing at a CAGR of about 25% over the last six years, driven by the increased adoption of OLED displays and higher equipment sales to Chinese LCD manufacturers. However, things look set to slow down over 2019, partly driven by lower demand growth for consumer electronics products such as TVs and smartphones, and also due to the current trade tensions between the U.S. and China. One of the key drivers of the projected decline has been the weakness in the TV space, with delays in some major TV factory projects pushing equipment demand into 2020. There could be some pressure in the OLED market as well. While OLED investments and production are expected to pick up in 2019 compared to 2018, it appears that Applied’s OLED production equipment is falling behind the technology sold by its rivals in the backplane and encapsulation space, resulting in some market share losses.

That said, the long-term performance of the division should improve, driven by Applied’s focus on large-size deposition equipment for panels. For instance, the Gen 10.5 panels can produce eight 65-inch TVs compared to just three on Gen 8.5, making it important for LCD manufacturers to transition to these technologies to improve their efficiency. Separately, the adoption of rigid OLEDs has also been growing in smartphones, while products such as smartphones based on the flexible OLED display technology are also approaching commercialization, potentially helping demand in the long run.

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