Company Reports

Applied Materials is the largest supplier in the world of wafer fabrication equipment for semiconductors. It holds the broadest portfolio, in our view, which we think should enable it to maintain its leading market share. In our view, Applied Materials' breadth in chip manufacturing gives it stickier inroads to customers by selling integrated solutions across technologies. We expect Applied Materials to grow at a mid-single-digit pace over the course of market cycles as it benefits from trends toward more-complex chips into the long term, including gate all-around transistors, advanced packaging, and artificial intelligence.

We raise our fair value estimate for shares of wide-moat Applied Materials to $168 per share, from $152, as we raise our medium-term growth estimates. We are increasingly confident in Applied’s ability to generate above-market growth from cutting-edge technologies like gate all-around, or GAA, transistors and high-bandwidth memory, or HBM. Fiscal second-quarter results and fiscal third-quarter guidance provided modest upside to our estimates, but our valuation increase is rooted in longer-term assumptions. In fiscal 2024, Applied’s results are being driven by strong DRAM and leading-edge logic chip equipment sales. Long-term, we view Applied as well-positioned, with its broad and moaty portfolio of equipment to continue gaining share in cutting-edge applications for new chips. Despite a strong fundamental opportunity, we continue to view Applied’s valuation as challenging.

We maintain our $152 fair value estimate for wide-moat Applied Materials after the company's fiscal second-quarter outlook met our above-consensus model and aligned with our long-term thesis. Applied is enjoying a recovering chip market, with particular strength in artificial intelligence spending on cutting-edge logic chips and DRAM. Its outlook for calendar 2024 matches that of peers like Lam Research and KLA and entails growth in cutting-edge logic and memory spending, partially offset by moderation in lagging-edge logic. We continue to see Applied as well positioned to benefit from rising chip demand and win market share with its wide and deep portfolio of equipment. The stock shot up as much as 12% after hours following the release, and we continue to see it as overpriced.

Applied Materials is the largest supplier in the world of wafer fabrication equipment for semiconductors. It holds the broadest portfolio, in our view, which we think should enable it to maintain its leading market share. In our view, Applied Materials' breadth in chip manufacturing gives it stickier inroads to customers by selling integrated solutions across technologies. We expect Applied Materials to grow at a mid-single-digit pace over the course of market cycles as it benefits from trends toward more-complex chips into the long term, including gate all-around transistors, advanced packaging, and artificial intelligence.

We maintain our $152 fair value estimate for shares of wide-moat Applied Materials after the firm reported good fiscal fourth-quarter results and guidance largely met our expectations. Applied continues to enjoy strong demand for lagging-edge chip equipment, particularly out of China. Management is calling for this demand to moderate through fiscal 2024, but to be offset by recovering demand in advanced logic and memory chips.

We raise our fair value estimate for wide-moat Applied Materials to $152 per share, from $110, behind higher long-term expectations for growth in both wafer fabrication equipment and for Applied. We believe trends toward advanced packaging, artificial intelligence, and denser roadmaps for both logic and memory chips will drive durable demand for the firm. We expect softer results through fiscal 2024 in a weaker chip market, but would encourage investors to focus on these long-term growth drivers. We see shares as slightly undervalued.

Applied Materials is the largest supplier in the world of wafer fabrication equipment for semiconductors. It holds the broadest portfolio, in our view, which we think should enable it to maintain its leading market share. In our view, Applied Materials' breadth in chip manufacturing gives it stickier inroads to customers by selling integrated solutions across technologies. We expect Applied Materials to grow at a mid-single-digit pace over the course of market cycles as it benefits from trends toward more-complex chips into the long term, including gate all-around transistors, advanced packaging, and artificial intelligence.

We maintain our $110 fair value estimate for wide-moat Applied Materials after good fiscal third-quarter results. Sales in the quarter, as well as guidance for the fiscal fourth quarter, exceeded our model, but our long-term forecast is intact. Applied is enjoying good demand for its trailing-edge products, which is helping to offset weakness in the mobile and personal computer markets. Similar to peers like KLA and Lam that have already reported, Applied’s services business is also a good buoy to sales. A severe downcycle in memory chips is still weighing on results, but DRAM sales are faring much better than for flash. All in, we continue to view Applied as well-positioned to capitalize on long-term secular trends toward the Internet of Things, and advances in cutting-edge chips for applications like artificial intelligence, or AI. Nevertheless, we continue to find valuation challenging and see shares as overvalued.

Applied Materials is the largest vendor of semiconductor fabrication tools globally. While competitors tend to specialize in a single core competency, Applied competes in almost every key equipment segment with the exception of photolithography. As a result, all major chipmakers develop strong relationships with Applied that span multiple process steps of their chip production. The firm is the dominant player in the material deposition and removal areas, among others. Applied boasts an impressive global presence with an installed base of more than 43,000 tools and field service engineers stationed in nearly every leading-edge chip-manufacturing facility in the world. With semiconductor fabrication becoming increasingly complex, resulting in more process steps and new manufacturing technologies, collaboration between chipmakers and equipment providers is set to reach unprecedented levels. We expect Applied to leverage existing relationships and insights into future customer technology needs to take advantage of the proliferating demand for state-of-the-art chips.

Wide-moat Applied Materials reported fiscal second-quarter revenue above the midpoint of the firm’s guidance, thanks to strength in tools for Internet of Things, communication, automotive, power management, and sensors applications, or ICAPS. Robust demand for the firm’s ion implantation tools is being driven by investments in silicon carbide manufacturing to support the proliferation of electric vehicles. Management expects its ICAPS sales to offset weaker memory spending during its fiscal third quarter as well. We maintain our view that the wafer fab equipment market will be down over 20% in 2023 primarily due to weaker memory spending, but Applied’s greater exposure to overall logic and foundry customers should allow it to outperform the industry in 2023. Our fair value estimate remains $110 per share for Applied, and we view shares as modestly overvalued following the recent run-up in the stock (up 38% year to date).

Wide-moat Applied Materials reported fiscal first-quarter revenue above the midpoint of the firm’s guidance, thanks to strength in its lagging-edge logic and foundry tools for Internet of Things, communication, automotive, power management, and sensors applications, or ICAPS. Management expects its ICAPS sales to offset weaker memory spending during its fiscal second quarter as well. We maintain our view that the wafer fab equipment market will be down 22% in 2023 primarily due to weaker memory spending, but Applied’s greater exposure to logic and foundry customers should allow it to outperform the industry in 2023. Our fair value estimate remains $110 per share for Applied and we view shares as fairly valued following the recent run-up in the stock (up 54% since mid-October).

Wide-moat Applied Materials reported fiscal fourth-quarter revenue above the midpoint of the firm’s updated guidance provided on Oct. 12 due to the latest export restrictions on U.S. semiconductor equipment to China. Specifically, management had lowered its revenue outlook to $6.4 billion (from $6.65 billion previously), but ultimately overestimated the impact of the restrictions while enjoying improved supply conditions that enabled stronger shipments. We maintain our view that the wafer fab equipment market will be down 22% in 2023 primarily due to weaker memory spending. Our fair value remains $110 per share for Applied and we view shares as fairly valued following the recent run-up in the stock (up 39% over the past month).

Applied Materials is the top vendor of semiconductor fabrication tools. While competitors tend to specialize in a single core competency, Applied competes in almost every key equipment segment with the exception of photolithography. As a result, all major chipmakers develop strong relationships with Applied that span multiple process steps of their chip production. The firm is the dominant player in the material deposition and removal areas, among others. Applied boasts an impressive global presence with an installed base of more than 43,000 tools and field service engineers stationed in nearly every leading-edge chip-manufacturing facility in the world. With semiconductor fabrication becoming increasingly complex, resulting in more process steps and new manufacturing technologies, collaboration between chipmakers and equipment providers is set to reach unprecedented levels. We expect Applied to leverage existing relationships and insights into future customer technology needs to take advantage of the proliferating demand for state-of-the-art chips.

On Oct. 12, Applied Materials revised its outlook for its fiscal fourth quarter that included revenue of $6.4 billion, plus or minus $250 million, versus $6.65 billion, plus or minus $400 million. The revised sales outlook incorporates the impact of the latest export restrictions partially offset by supply chain improvements. Specifically, the firm expects the new restrictions will reduce its fourth-quarter revenue by about $400 million, plus or minus $150 million. The latest export restrictions target advanced semiconductors and wafer fab equipment that could be used to advance China’s military technology. While Applied is pursuing export licenses, management expects a similar impact to its fiscal 2023 first-quarter results (which ends in January 2023). After taking into account these new export restrictions and a weaker outlook for 2023 equipment spending, we are reducing our fair value estimate to $110 per share from $142 per share for wide-moat Applied Materials. While shares are undervalued relative to our revised fair value estimate, we think market conditions will remain volatile for several quarters as the firm navigates uncertainty related to export restrictions and weaker equipment spending in 2023.

Wide-moat Applied Materials reported fiscal third-quarter revenue above the midpoint of guidance and our expectations. Despite recent supply chain headwinds continuing to prevent the firm from fully meeting customer demand, the firm was able to deliver stronger results thanks to better-than-expected equipment output. Management maintained its view that unconstrained demand for wafer fab equipment, or WFE, to be over $100 billion in 2022, but conceded the actual figure would be in the mid-$90 billion range due to shipment delays. That said, we expect WFE spending in 2023 to be down year over year due to weaker memory investments, though we think leading-edge logic and foundry capital expenditures will be more resilient due to strategic investments by the likes of TSMC, Intel, and Samsung.

Wide-moat Applied Materials reported fiscal second-quarter revenue below the midpoint of management’s guidance and our expectations. The primary culprit was COVID-19-related shutdowns in China that delayed around $150 million of revenue in the quarter. Since most of its peers’ quarters did not include April, we think Applied Materials' results appear worse given the shutdowns had the biggest impact during the final month of its fiscal quarter. We suspect the likes of Lam Research, ASML, and KLA are also facing similar headwinds that will negatively weigh on their respective June quarter results. Despite supply challenges, wafer fab equipment, or WFE, demand remains robust. Management expects unconstrained demand for WFE to be over $100 billion in 2022. Given the firm’s backlog continues to grow, we have confidence in sequential growth over the rest of the year as supply improves. That said, we remain cautious of WFE spending slowing in 2023 as new capacity comes online and the ongoing chip shortage improves. We are maintaining our fair value estimate of $142 per share and view shares as attractive at current levels.

Wide-moat Applied Materials reported fiscal first-quarter revenue above the midpoint of management’s guidance. While the firm continues to navigate supply chain constraints, wafer fab equipment, or WFE, demand remains robust. Management expects 2022 WFE spending to cross the $100 billion threshold (up from the mid-$80 billion range in 2021). During the quarter, Applied's semiconductor systems backlog grew $1.3 billion to $8 billion, which gives us confidence in lasting growth over the course of the year. That said, we remain cautious of WFE spending slowing in 2023 as new capacity comes online and the ongoing chip shortage improves. We are maintaining our fair value estimate of $142 per share. Shares look fairly valued at current levels.

Applied Materials is the top vendor of semiconductor fabrication tools. While competitors tend to specialize in a single core competency, Applied competes in almost every key equipment segment with the exception of photolithography. As a result, all major chipmakers develop strong relationships with Applied that span multiple process steps of their chip production. The firm is the dominant player in the material deposition and removal areas, among others. Applied boasts an impressive global presence with an installed base of more than 43,000 tools and field service engineers stationed in nearly every leading-edge chip-manufacturing facility in the world. With semiconductor fabrication becoming increasingly complex, resulting in more process steps and new manufacturing technologies, collaboration between chipmakers and equipment providers is set to reach unprecedented levels. We expect Applied to leverage existing relationships and insights into future customer technology needs to take advantage of the proliferating demand for state-of-the-art chips.

Wide-moat Applied Materials reported fiscal fourth-quarter revenue below the midpoint of management’s guidance, with supply chain constraints negatively affecting sales by at least $300 million. Ironically, Applied is having challenges procuring certain chips for its equipment from suppliers that are also the firm's customers, particularly in logic, power, and analog chips. Positively, management sees a healthy demand environment, with wafer fab equipment, or WFE, spending expected to be up again in 2022. We estimate 2021 WFE to be in the mid-$80 billion range (up from $65 billion in 2020). The firm boasts a backlog of $11.8 billion, which is up 77% relative to the same period last year. Consequently, we are raising our fair value estimate to $142 per share from $131, as we roll our model forward and incorporate a stronger outlook for 2022.

Wide-moat Applied Materials reported fiscal third-quarter results above management’s guidance, while guiding fiscal fourth-quarter revenue above our expectations. We note Applied and its peers have all called for strong growth in 2021, driven by record capital expenditure levels at TSMC and Intel as well as solid memory spending. Management expects Applied’s fourth-quarter revenue to be up 34% year over year at the midpoint, with momentum persisting into 2022. Consequently, we are raising our fair value estimate to $131 per share from $125. Shares look fairly valued at current levels.