Morningstar | Challenging Wafer Fab Equipment Environment Doesn't Hinder Our Positive View of Applied Materials
Applied Materials reported fiscal first-quarter results consistent with expectations while painting a dreary picture for 2019, as memory investments will be considerably lower during the year. With spending skewed to logic and foundry investments (particularly with extreme ultraviolet lithography accounting for a larger portion of equipment spending), Applied’s share of wafer fab equipment is set to be lower in 2019. Our fair value estimate of $49 per share incorporates our view that the wide-moat firm’s top line will decline in the low double digits in fiscal 2019. Nevertheless, our positive thesis on the rise in capital intensity for semiconductor fabrication is intact. As we look beyond 2019, we anticipate memory-related investments to resume growth as chipmakers pursue advanced 3D NAND and DRAM technologies that require more tools from the likes of Applied.Fiscal first-quarter sales were down 11% year over year to $3.75 billion, chiefly because silicon systems sales were down 20%. Memory revenue fell 28% year over year. Partially offsetting the silicon systems weakness was growth in services and display revenue, up 9% and 11%, respectively, versus the same period last year. For fiscal 2019, the firm foresees high-single-digit top-line growth in services, even with wafer fab equipment down significantly. This can be attributed to the fact that more than half of service revenue is derived from subscription-type sales via long-term service agreements, which we believe will help mitigate Applied’s revenue volatility associated with fluctuations in wafer fab equipment. Gross margins were roughly flat sequentially at 44.4%, thanks to a superior revenue mix with lower display sales. Management expects second-quarter revenue to be at a midpoint of $3.48 billion, implying a sequential decline of 7%.
For more information on our thoughts on the wafer fab equipment space in 2019 and beyond, please see our recent Select presentation, "Buy the Chip Equip Dip."
Applied Materials provides manufacturing equipment, services and software to the semiconductor, display and related industries. The company's segments are: Semiconductor Systems, which develops, manufactures and sells a range of manufacturing equipment used to fabricate semiconductor chips; Applied Global Services, which provides integrated solutions to support equipment and fab performance and productivity; and Display and Adjacent Markets, which is comprised of products for manufacturing liquid crystal displays, organic light-emitting diodes and other display technologies for TVs, monitors, laptops, personal computers, electronic tablets, smart phones, and other consumer-oriented devices.
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