Understanding Applied Materials’ Business Model And Performance Across Segments

Applied Materials (NASDAQ:AMAT) is the world’s largest semiconductor fabrication equipment supplier based on revenue. It is also a leading supplier of LCD fabrication equipment to the flat panel display industry and of solar PV manufacturing systems to the solar industry.

A] Business Model

1. What does it offer?
   Applied Materials’ revenue is derived from the following 3 streams:
   • The silicon systems business, which sells equipment used by customers to manufacture semiconductor devices such as microprocessors and memory.
   • The global services business, which provides integrated solutions to optimize equipment, performance, and productivity. This includes spares, upgrades, services, certain remanufactured earlier generation equipment and factory automation software.
   • The display business, which provides products for manufacturing liquid crystal displays (LCDs), organic light-emitting diodes (OLEDs), and other display technologies.
2. Who Pays?
   • Applied Materials’ manufacturing systems are used by semiconductor manufacturers and foundries, along with major display and PV solar panel manufacturers.
   • Applied also provides expertise to the same manufacturers and foundries on how to use the manufacturing equipment optimally and reduce operating costs.
3. What are the alternatives?
   • Applied Materials competes with the likes of KLA-Tencor, Tokyo Electron, Lam Research, and Arrow Electronics.
4. Historical Revenue Trend and Expectations
   • Applied Materials’ revenue has grown by about $6.5 billion from 2016 to 2018, on the back of an increase in demand and growing spending by memory and logic chip vendors.
   • We estimate a drop in revenue for 2019, amidst ongoing trade tensions, along with falling memory prices and weakening demand in the TV space.
   • However, things are expected to get better gradually, with the increasing adoption of OLED displays and preference for Applied’s more efficient LED panels in TV sets.

You can view the Trefis interactive dashboard – Applied Materials Revenue: How does Applied Materials make money? – You can modify our key drivers to arrive at your own estimates for the company’s revenue.

B] Performance across key segments

1. Semiconductor Systems Revenue
   • Revenue from this stream has grown by $4 billion from FY’ 16 to FY’ 18, but we expect a slight setback in 2019.
   • This is on account of weaker capital spending by memory and logic chip vendors, on the back of declining NAND and DRAM memory prices.
     
2. Global Services Revenue
   • Revenue from their global services division has grown nearly 50% over this period.
   • Even with a slowdown in memory and display demand, we do not foresee a fall in revenue from this stream, as we expect consulting services to continue in line with those of FY’ 18.
     
3.  Display Revenue
   • This segment has seen a 100% growth in revenue over the past 2 years, but we expect sales to decline around 25% on the back of lower demand growth and ongoing trade tensions.
   • The ongoing weakness in the TV space has led to delays in some major TV factory projects, pushing equipment demand into 2020.
     

C] Revenue Outlook

• For FY’ 19, we expect revenue to drop 16.18% to $14.5 billion, driven by weakening memory prices and a scale-back of capital spending by memory and display vendors.
• However, we expect things to get better in FY’ 20, with a revenue forecast of $15.5 billion, amidst growth in demand for OLED displays, and a shift to more efficient semiconductor technology.

According to Applied Materials Valuation by Trefis, we have a price estimate of $46 per share for AMAT’s stock.

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