INVESTMENT THESIS
The company ‘navigated unprecedented challenges’ in fiscal 2020 while executing on its roadmap and finding new ways to work.
For the longer term, Applied Materials believes growth drivers for the semiconductor industry overall and WFE investment are firmly in place.
RECENT DEVELOPMENTS
Applied Materials ‘navigated unprecedented challenges’ in fiscal 2020, according to CEO Gary Dickerson, while executing on its roadmap and finding new ways to work. AMAT believes it is outperforming its peer group, based on 26% growth in semiconductor systems revenue in fiscal 2020 amid slower peer-group growth.
The world was always heading to a digital future; the pandemic has broadly accelerated what was already occurring.
In the coming year, as data demand growth drives mass storage requirements for 16 Tb and above HDDs, we look for DRAM to out-grow NAND in calendar 2021.
AMAT believes it is outperforming its peer group, based on 26% growth in semiconductor systems revenue in fiscal 2020 amid slower peer-group growth. The CEO called out specific competencies within Silicon systems that contributed to FY20 revenue growth above the industry average. Inspection-related revenue was up 46% for the fiscal year. Patterning, while representing little more than 6% of FY20 revenue, represents another significant growth and share-capture opportunity.
With service renewal rates pushing past 90%, the outlook is for continued growth in services.
The fiscal 4Q20 SS operating margin of 35.0% for 4Q20 expanded from 33.7% sequentially and 28.3% year-over-year.
In May 2020, The Wall Street Journal reported that Taiwan Semiconductor Manufacturing Co. (TSMC) is planning to spend up to $12 billion to build a semiconductor manufacturing plant in Arizona. Construction would begin in 2021 with production targeted to begin in 2024. The new plant would make chips in 5 nm process, currently the most advanced process node. During an extended period in which spending by memory chip makers has been weak, WFE companies such as AMAT have benefited from rising spending by foundry customers such as TSMC.
For 2Q20, the strongest regional market remains China, which represented one-third of revenue and grew 31% annually in 4Q20 and 28% for all of FY20. Chinese exposure remains a risk, given U.S government efforts to restrict the flow of technology to China.
AMAT remains committee to completing the planned acquisition of Kokusai Electric Corp.
As the U.S. tightens restrictions on China, that could impact AMAT’s business development strategy. In July, AMAT and Kokusai agreed to extend the deal’s deadline to September 30, with another three-month extension to year-end 2020. Final pending approval must come from China, which has shot down other deals (i.e., Qualcomm-NXP) via inaction. AMAT in August stated that it is having ‘constructive discussions’ to win that final regulatory approval. There does not seem to be much movement on the deal, although we could see the two companies extend the deal date further to await inauguration of a new American president.
In the near-term, consumer spending could be a potential headwind to final-user demand for semiconductors.
RECENT DEVELOPMENTS
For the long haul, WFE spending has stabilized at 12% of global semiconductor spending. That gives AMAT better insight into demand trends and enabling improved planning and linearity. Improved underlying WFE industry dynamics reflect a vastly broader end-market opportunity and multiple new growth drivers. In addition to legacy business in computing and mobile devices, these major new drivers include IoT, big data, robotics, autonomous driving, and artificial intelligence.
EARNINGS & GROWTH ANALYSIS
Which was up 25% year-over-year and 7% sequentially. Revenue was above the $4.60 billion midpoint of management’s $4.40-$4.80 billion guidance range for fiscal 4Q20, and also above the consensus forecast of $4.60 billion.
Non-GAAP earnings of $1.25 per diluted share for 4Q20 were up 56% year-over-year and $0.19 on a sequential basis, while running $0.08 ahead of consensus expectations.
Our preliminary non-GAAP EPS projection for fiscal 2022, which does not include Kokusai, is $5.50 per share.
VALUATION
On November 13, BUY-rated AMAT closed at $72.81, up $3.01.
Source: Argus
