Applied Materials: Investing in Chips

04/30/2020 5:00 am EST

Focus: TECHNOLOGY

Richard Moroney

Editor, Dow Theory Forecasts

In recent months, chipmakers have invested heavily in new equipment for making semiconductors with widths of seven nanometers or less, though the global pandemic has driven many firms to postpone expansion plans, observes Richard Moroney, long-term growth expert and editor of Dow Theory Forecasts.

Analysts now expect sales of semiconductor equipment to decline this year, versus prior expectations for doubledigit growth, helped by a second-half rise in spending on memory. However, a 2021 recovery seems probable.

For Applied Materials (AMAT), the consensus calls for sales growth of 15% and 29% higher per-share profits in the second half of fiscal 2020 ending July, followed by gains of 7% in sales and 12% in profits in fiscal 2021.

Applied Materials rescinded its profit guidance last month. Analyst estimates have declined over the last 30 days, with more downward revisions expected once semiconductor-related firms release results.

By the time Applied Materials announces April-quarter results, most of its rivals will have posted March quarter numbers, giving the market a better idea what to expect.

Applied Materials, with annual sales of more than $14 billion and a stock-market value of $49 billion, is the world’s largest maker of semiconductor equipment, selling gear for all stages of the manufacturing process.

The silicon systems unit (62% of sales) focuses on etching, deposition, metrology, and inspection — the front end of the semiconductor-manufacturing process. The services unit (26%) taps into a massive and growing base of installed customers, helping to boost factory efficiency and increase production.

Applied Materials also creates components for fabricating flat-panel displays (12%). The display unit has demonstrated sharp cyclicality in the past. But, with many newer mobile devices now using organic LED touch-screens, demand could smooth out somewhat going forward.

Given Applied Materials’ size, robust cash generation and solid balance sheet, we expect the company to adjust better than most, likely gaining market share during the downturn. At 16 times trailing earnings, Applied Materials trades at a 21% discount to the industry median.

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