VALUATION HIGHLIGHTS
- Silicon Wafer Fab Equipment constitutes 64% of the Trefis price estimate for Applied Materials's stock.
- Applied Global Services constitute 34% of the Trefis price estimate for Applied Materials's stock.
WHAT HAS CHANGED?
Q1 FY'25 Earnings
Applied posted better-than-expected Q1 FY'25 results, with revenues growing 7% and adjusted earnings rising 12% year-over-year to $2.38 per share. However, the company's Q2 revenue guidance of $7.1 billion came in below expectations due to tighter restrictions on the sale of leading-edge chipmaking equipment to Chinese companies.
Note: The company's FY'24 ended October 27, 2024.
Generative AI boom drives Applied stock
Generative artificial intelligence has captured the imagination of the tech world following the launch of the ChatGPT chatbot. This trend could help drive long-term demand for high-end graphics chips that work on computationally intensive AI algorithms. This could directly benefit Applied as well, given that its customers could look to invest in more sophisticated semiconductor manufacturing equipment.
BUSINESS SUMMARY
Applied Materials provides manufacturing equipment, services, and software to semiconductor wafers and chips manufacturers, flat panel liquid crystal displays (LCDs), solar PV cells and modules, and other electronic devices.
Applied Materials is one of the world's largest semiconductor fabrication equipment suppliers based on revenue.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Silicon wafer fab equipment
- Silicon Systems Revenue: We forecast that Applied Materials' Silicon Systems Revenue will grow to about $33 billion by the end of our review period. Applied Materials' confidence in gaining market share in wafer fabrication equipment is supported by its three major customers in the segment. These three customers accounted for approximately 50% of the company's net sales in the past few years. A decline in business from any one of these customers could be a setback for Applied and could lead to a major fall in the company's SSG market share and overall revenues. For instance, if revenues remain flat at levels of about $20 billion by the end of our review period, our price estimate for the company could decline by almost 20%.
SOURCES OF VALUE
Applied operates in three reportable segments: Silicon Wafer Fab Equipment Group, Applied Global Services, and Display.
Silicon Wafer Fab Equipment Group
The Silicon Wafer Fab Equipment segment continues to be the most valuable segment for Applied, generating around 73% of revenues in 2024. Applied is the market leader in manufacturing equipment for silicon-based semiconductor products, and we expect it to retain its leadership due to its superior product portfolio and continued investment in research and development.
Applied Global Services
Applied Materials' offerings in services, particularly those related to yield management and improvements in the 200mm manufacturing equipment business, earned it significant growth. With revenue of over $5.6 billion in 2024, it comprises roughly 22% of overall revenues. We expect the demand for Applied Materials' services in fab management and automation to remain strong during our forecast period, as the semiconductor manufacturing process gets more complex and better automation and management services start affecting the yield of semiconductor manufacturers.
KEY TRENDS
Technology Transitions To Drive Higher Levels of Investment In The Future.
Applied believes that the semiconductor industry's growth is fueled by evolving trends in mobility, connectivity, video, and wearable devices. This is accelerating innovations in mobile processors, solid-state storage, and interactive displays. Areas such as AI and Big Data will also be big drivers of growth over the next decade, and semiconductors are likely to be the foundation of these technologies. Applied Materials' customers are focused on winning share through these inflection points, and this will result in a period of sustained investment by semiconductor customers. The company's key customers are aggressively pursuing 7nm and 10 nm process technologies.
Changing Trend In Semiconductor Spending
While smartphones have been the biggest driver of semiconductor spending in recent years, emerging technologies such as the Internet of Things (IoT), virtual reality, augmented reality, 5G networks, big data, artificial intelligence, and self-driving cars are projected to drive growth going forward. Applied says that these areas have the potential to significantly increase semiconductor spending and drive advances in silicon technology in the future. The company also believes that capital equipment spending has become less cyclical and more normalized over time because of increasing demand in these areas.
