In my ongoing shift from IT to biotechnology stocks, I am dropping coverage of Akamai. This is not a reflection on the company. I once owned AKAM and did well with it. I have not owned it for a couple of years.
On the other hand I bought some Seattle Genetics (SGEN). This is a speculative buy. I am more impressed by their pipeline and platform than by the revenue from their one approved drug so far. I would guess that 2016 would be the earliest this investment could pay off substantially, as guidance for 2015 is for moderate growth. The thing to watch in 2015 is pipeline progress. You can check out my notes, Seattle Genetics Q4 2014 analyst call for more details.
Also, I hope to write Seeking Alpha articles on SGEN and AMGN, but can't say how soon. This afternoon I will be listening to the Applied Materials (AMAT) conference and taking notes.
Disclosure: I do not own AKAM. I own SGEN, AMGN, and AMAT.
Showing posts with label applied materials. Show all posts
Showing posts with label applied materials. Show all posts
Wednesday, February 11, 2015
Monday, May 19, 2014
Applied Materials, Dendreon, and Hansen Medical
Just a few notes today on three of the companies I own or follow.
Applied Materials (AMAT) had a bang-up quarter, reporting on May 15. Management has been predicting market share gain because of new tools for the semiconductor industry, some based on Applied's deeper abilities in materials processing science. Revenue was $2.35 billion, up 7% sequentially from $2.19 billion and 19% from $1.97 billion in the year-earlier quarter. GAAP EPS (diluted earnings per share) were $0.21, flat sequentially from $0.21 and up from negative $0.11 year-earlier. Non-GAAP EPS was $0.28.
Applied is on two separate cycles: the semiconductor process upgrade cycle (for instance, right now the transition from 28 nm processes to 20 nm processes) and the end-device demand cycle, which tends to follow global economic ups and downs. Long-term investors have to learn to ignore the cyclical nature, or use it to buy AMAT when it is cheap. As I write it is at $20.19, cheap if EPS keeps growing. Pays a divident of $0.10 per quarter too, working out to just under 2% per year at the current price. Applied is waiting for regulatory approval to combine with Tokyo Electron. If the merger goes well they could crush the competition. For more see my Applied Materials Q2 2014 notes.
Dendreon (DNDN) continues to make progress despite its woes. Early Phase II data in its study for its vaccine for urothelial cancer is encouraging. But unless the final Phase II data is extremely strong, we still have a large, expensive, slow Phase III trial to attempt to gain regulatory approval. In the meantime everything depends on how management reduces the cash burn. Some data due to be presented later this month may also encourage more patients and doctors to prescribe Provenge; any increase in revenue would be helpful. There is a lot of short interest in this stock as shorts bet that Provenge sales will plunge (something they've been predicting for 2 years) and the company will go bankrupt before European sales of Dendreon ramp up in Q1 2015. For more see my Dendreon Q1 2014 notes.
Hansen Medical's (HNSN) stock price has been on a downward tear since it hit 52-week high of $2.89 on February 11. It sank to $1.10 on May 12 and now has had a dead-cat bounce, probably short covering, back up to $1.31 as I speak. Hansen Medical has two catheter-cased robots, one for electrophysiology and one for vascular surgery, that are much praised but seldom sold. With a market cap of $146 million and Q1 sales of $3.7 million, you can see why it is a highly speculative, venture-capital type of bet to make. Still, there is always next quarter; they claim the sales pipeline is strong, it is just hard to get hospitals to actually commit to new capital equipment purchases. I think the questioning of Intuitive Surgical's robots has not helped. For more see my Hansen Medical Q2 2014 notes.
I own all three stocks (but not Intuitive Surgical). I reserver the right to buy more, or to sell my shares, at any time. I am an investor and financial journalist.
Applied Materials (AMAT) had a bang-up quarter, reporting on May 15. Management has been predicting market share gain because of new tools for the semiconductor industry, some based on Applied's deeper abilities in materials processing science. Revenue was $2.35 billion, up 7% sequentially from $2.19 billion and 19% from $1.97 billion in the year-earlier quarter. GAAP EPS (diluted earnings per share) were $0.21, flat sequentially from $0.21 and up from negative $0.11 year-earlier. Non-GAAP EPS was $0.28.
Applied is on two separate cycles: the semiconductor process upgrade cycle (for instance, right now the transition from 28 nm processes to 20 nm processes) and the end-device demand cycle, which tends to follow global economic ups and downs. Long-term investors have to learn to ignore the cyclical nature, or use it to buy AMAT when it is cheap. As I write it is at $20.19, cheap if EPS keeps growing. Pays a divident of $0.10 per quarter too, working out to just under 2% per year at the current price. Applied is waiting for regulatory approval to combine with Tokyo Electron. If the merger goes well they could crush the competition. For more see my Applied Materials Q2 2014 notes.
Dendreon (DNDN) continues to make progress despite its woes. Early Phase II data in its study for its vaccine for urothelial cancer is encouraging. But unless the final Phase II data is extremely strong, we still have a large, expensive, slow Phase III trial to attempt to gain regulatory approval. In the meantime everything depends on how management reduces the cash burn. Some data due to be presented later this month may also encourage more patients and doctors to prescribe Provenge; any increase in revenue would be helpful. There is a lot of short interest in this stock as shorts bet that Provenge sales will plunge (something they've been predicting for 2 years) and the company will go bankrupt before European sales of Dendreon ramp up in Q1 2015. For more see my Dendreon Q1 2014 notes.
Hansen Medical's (HNSN) stock price has been on a downward tear since it hit 52-week high of $2.89 on February 11. It sank to $1.10 on May 12 and now has had a dead-cat bounce, probably short covering, back up to $1.31 as I speak. Hansen Medical has two catheter-cased robots, one for electrophysiology and one for vascular surgery, that are much praised but seldom sold. With a market cap of $146 million and Q1 sales of $3.7 million, you can see why it is a highly speculative, venture-capital type of bet to make. Still, there is always next quarter; they claim the sales pipeline is strong, it is just hard to get hospitals to actually commit to new capital equipment purchases. I think the questioning of Intuitive Surgical's robots has not helped. For more see my Hansen Medical Q2 2014 notes.
I own all three stocks (but not Intuitive Surgical). I reserver the right to buy more, or to sell my shares, at any time. I am an investor and financial journalist.
Wednesday, August 21, 2013
Applied Materials long
Applied Materials Process Advantages Build Market Share [August 21, 2013]
One reason I like to have stocks like AMAT in my portfolio, besides the dividend, is that most investors have very short time horizons. If Applied Materials non-GAAP EPS is indeed in the vicinity of $1.50 per share for full fiscal 2016, then it should be around $30 per share then. Almost doubling what it can be bought for today.
Doubling in 3 years is actually great returns. But so many investors are just thinking about what returns they can get within the next quarter, or the next few hours if they are day trading, or the next few nanoseconds if they are computer algorithms, that this long-term value is overlooked. And in many cases, three years from now the investors who pursued what they thought were short-term opportunities will not have doubled their money. A substantial percentage will have halved their money, or worse.
I do have some of my portfolio in high-risk, potentially high gain small cap stocks, but the bulk of it is in Nasdaq 100 stocks or stocks that could potentially join that index.
One reason I like to have stocks like AMAT in my portfolio, besides the dividend, is that most investors have very short time horizons. If Applied Materials non-GAAP EPS is indeed in the vicinity of $1.50 per share for full fiscal 2016, then it should be around $30 per share then. Almost doubling what it can be bought for today.
Doubling in 3 years is actually great returns. But so many investors are just thinking about what returns they can get within the next quarter, or the next few hours if they are day trading, or the next few nanoseconds if they are computer algorithms, that this long-term value is overlooked. And in many cases, three years from now the investors who pursued what they thought were short-term opportunities will not have doubled their money. A substantial percentage will have halved their money, or worse.
I do have some of my portfolio in high-risk, potentially high gain small cap stocks, but the bulk of it is in Nasdaq 100 stocks or stocks that could potentially join that index.
Thursday, August 15, 2013
Applied Materials Sees Market Share Gains from R&D efforts
Applied Materials (AMAT) issued July quarter results that were within guidance and therefore probably a disappointment to speculators.
You can read my notes here: Applied Materials fiscal Q3 2013 Analyst Call
Applied Materials makes the rather expensive machines that are used to make semiconductor chips. The optimistic part of the presentation I found believable was that AMAT has been able to cut administrative expenses and move the money over to use for R&D. The result is new, improved machines that will gain market share, in particular as the newer 20 nm-ish process node goes mainstream in 2014.
In any case Applied Materials generates a lot of cash and pays a nice dividend. It is one of the safest stocks I own, and if 2014 is a good year, hopefully they will increase the dividend again.
I hope to write at more length for Seeking Alpha, but I have several other companies on my list at this point, so it could be a while.
You can read my notes here: Applied Materials fiscal Q3 2013 Analyst Call
Applied Materials makes the rather expensive machines that are used to make semiconductor chips. The optimistic part of the presentation I found believable was that AMAT has been able to cut administrative expenses and move the money over to use for R&D. The result is new, improved machines that will gain market share, in particular as the newer 20 nm-ish process node goes mainstream in 2014.
In any case Applied Materials generates a lot of cash and pays a nice dividend. It is one of the safest stocks I own, and if 2014 is a good year, hopefully they will increase the dividend again.
I hope to write at more length for Seeking Alpha, but I have several other companies on my list at this point, so it could be a while.
Monday, April 22, 2013
Applied Materials, Process Nodes, and Future Profits
Applied Materials (AMAT) makes capital equipment for semiconductor chip manufacturing. Demand in that sector has not been robust these last couple of years, although it has come off the bottom that lagged after the recession. This article will look at AMAT as a long-term investment, not a short term trade. Given that, the first thing to note is that it pays a dividend, which is currently $0.10 per quarter, or 3.1% per year at the current $13.06 stock price.
I believe the largest factor determining future AMAT revenue and profit will be the ongoing trend towards new, small process nodes (indicated by the size of the lines used to put transistors in chips. 32 nanometer is older than 28 nm.) But let's start with where we are now.
AMAT last reported on February 13 for the first fiscal fiscal quarter of 2013, which ended January 28, 2013. Against an overall global semiconductor capital equipment spending drop of 16% in 2012, AMAT reported revenues of $1.57 billion, down 5% sequentially from $1.65 billion and down 28% from $2.19 billion in the year-earlier quarter. That is discouraging, for certain.
Applied's core semiconductor equipment business saw a Q1 y/y decline to $969 million from $1.34 billion, a decline of 28%. Its display screen segment did better, but the solar segment did worse. Display revenue dropped 17% y/y to $87 million from $104 million, which was already low by historic standards. Solar revenue dropped 77% y/y to $47 million from $206 million. There is a glut of solar supply in the market, so no turn around is expected until at least 2015. Display may see some rebound in 2013 as screen sizes start to increase in developing markets and new screen technologies are adapted.
The bulk of Applied's revenue and profit comes from the semiconductor segment. It is well known that demand for PCs has been down, and it is hard to predict where the bottom may lay. Demand for tablets and smartphones has been increasing. Overall demand is dampened because smartphones simply contain far less silicon than PC's do. They have weaker processing chips and far less memory.
Does that mean Applied and other semiconductor equipment manufacturers should be written off as dinosaurs? I think not. I think overall computational demand will continue to increase rapidly for at least the next two decades. To cram more computation into portable devices (and the computers in the cloud that serve those devices) the industry will continue to move to smaller process nodes.
Right now demand is still high at the 28 nm node. Most chips, which work in legacy, non-mobile applications, are still made at much older nodes. For high-end graphics chips from AMD and NVIDIA, 28 nm is the cutting edge. Intel is already manufacturing its newest CPUs at 20 nm, and new memory-chip production at Samsung is just started at 10 nm. Memory process nodes typically can be smaller than computing process nodes. The most advanced ARM-based chips were recently taped out at 16 nm at TSMC.
Smaller (newer) process nodes mean that more capability can be built into mobile devices (and also non-mobile devices). Transitions to 14 nm and 20 nm are almost entirely ahead of the industry. To some extent moving to these nodes may open up capacity at 28 nm, but there is a lot of technology out there that has yet to migrate to 28 nm.
The other factor is overall demand, and that depends on the global economy and the frequency of consumer upgrades. There is a lot of old equipment out there, as seen by the high percentage of PCs still running Windows XP. With the exception on Intel, Samsung, IBM, and a few others, most chip makers are now really chip designers who send their designs to foundries like TSMC and Globalfoundries for actual production. These foundries don't want to have capital equipment sitting idle, but neither do they want to lose business because of insufficient capacity.
Generally capacity has been lean since the recession, which is one reason why there has been a shortage of 28 nm capacity. The other reason 28 nm has been tight is it was harder to get it working with good yields than had been expected There is quite a bit of impatience right now among the more cutting-edge designers because of a lack of sub-28 nm capacity.
Anything under 28 nm is far more expensive to make than 28 nm. Only Intel and Samsung have had the vast capital resources to simply move to the lower nodes without concern about how much demand would be there at startup. Even Intel announced it was cutting back capital equipment spending by $1 billion in 2013 due to lower demand projections.
But what is bad for foundries is good for AMAT and other equipment manufacturers: future nodes will require far more spending on capital equipment. One reason is that some 20 nm chips will have a 3-D structure. This means a move away from lithography defined shrinking to process-defined, where with precision engineering AMAT claims a considerable advantage.
In addition to reporting revenue, AMAT reports orders for each quarter. The good news for Q1 was that orders of $2.11 billion were well above revenue and up 31% from orders in Q4, as well as up 5% y/y.
Guidance is for Q2 fiscal 2013 revenue to be up 15 to 25% sequentially. Non-GAAP EPS is expected between $0.09 and $0.15.
While Applied Materials has substantial competition in each of the types of tools that are needed for semiconductor manufacturing, it is second in overall sales revenue only to ASML in an industry where scale matters. ASML is not much bigger: it had sales of $7.9 billion in 2011, AMAT had $7.4 billion. Another American competitor is KLA-Tencor, which had $3.1 billion in sales, placing it fourth globally.
On the whole, I think it is likely that 2013 will be a year of improvement for AMAT, and with major gearing up for 20 nm in 2014, that will be a very good year. How much improvement depends on the degree of strengthening global demand for semiconductor chips.
Disclaimer: I am a long-term investor in AMAT. I also am long AMD, but do not own any other company mentioned in this article. I will not buy or sell AMAT stock for one week following this article's publication date.
See also:
My main AMAT analyst conferences page.
My Q1 2013 AMAT analyst conference notes
www.appliedmaterials.com
I believe the largest factor determining future AMAT revenue and profit will be the ongoing trend towards new, small process nodes (indicated by the size of the lines used to put transistors in chips. 32 nanometer is older than 28 nm.) But let's start with where we are now.
AMAT last reported on February 13 for the first fiscal fiscal quarter of 2013, which ended January 28, 2013. Against an overall global semiconductor capital equipment spending drop of 16% in 2012, AMAT reported revenues of $1.57 billion, down 5% sequentially from $1.65 billion and down 28% from $2.19 billion in the year-earlier quarter. That is discouraging, for certain.
Applied's core semiconductor equipment business saw a Q1 y/y decline to $969 million from $1.34 billion, a decline of 28%. Its display screen segment did better, but the solar segment did worse. Display revenue dropped 17% y/y to $87 million from $104 million, which was already low by historic standards. Solar revenue dropped 77% y/y to $47 million from $206 million. There is a glut of solar supply in the market, so no turn around is expected until at least 2015. Display may see some rebound in 2013 as screen sizes start to increase in developing markets and new screen technologies are adapted.
The bulk of Applied's revenue and profit comes from the semiconductor segment. It is well known that demand for PCs has been down, and it is hard to predict where the bottom may lay. Demand for tablets and smartphones has been increasing. Overall demand is dampened because smartphones simply contain far less silicon than PC's do. They have weaker processing chips and far less memory.
Does that mean Applied and other semiconductor equipment manufacturers should be written off as dinosaurs? I think not. I think overall computational demand will continue to increase rapidly for at least the next two decades. To cram more computation into portable devices (and the computers in the cloud that serve those devices) the industry will continue to move to smaller process nodes.
Right now demand is still high at the 28 nm node. Most chips, which work in legacy, non-mobile applications, are still made at much older nodes. For high-end graphics chips from AMD and NVIDIA, 28 nm is the cutting edge. Intel is already manufacturing its newest CPUs at 20 nm, and new memory-chip production at Samsung is just started at 10 nm. Memory process nodes typically can be smaller than computing process nodes. The most advanced ARM-based chips were recently taped out at 16 nm at TSMC.
Smaller (newer) process nodes mean that more capability can be built into mobile devices (and also non-mobile devices). Transitions to 14 nm and 20 nm are almost entirely ahead of the industry. To some extent moving to these nodes may open up capacity at 28 nm, but there is a lot of technology out there that has yet to migrate to 28 nm.
The other factor is overall demand, and that depends on the global economy and the frequency of consumer upgrades. There is a lot of old equipment out there, as seen by the high percentage of PCs still running Windows XP. With the exception on Intel, Samsung, IBM, and a few others, most chip makers are now really chip designers who send their designs to foundries like TSMC and Globalfoundries for actual production. These foundries don't want to have capital equipment sitting idle, but neither do they want to lose business because of insufficient capacity.
Generally capacity has been lean since the recession, which is one reason why there has been a shortage of 28 nm capacity. The other reason 28 nm has been tight is it was harder to get it working with good yields than had been expected There is quite a bit of impatience right now among the more cutting-edge designers because of a lack of sub-28 nm capacity.
Anything under 28 nm is far more expensive to make than 28 nm. Only Intel and Samsung have had the vast capital resources to simply move to the lower nodes without concern about how much demand would be there at startup. Even Intel announced it was cutting back capital equipment spending by $1 billion in 2013 due to lower demand projections.
But what is bad for foundries is good for AMAT and other equipment manufacturers: future nodes will require far more spending on capital equipment. One reason is that some 20 nm chips will have a 3-D structure. This means a move away from lithography defined shrinking to process-defined, where with precision engineering AMAT claims a considerable advantage.
In addition to reporting revenue, AMAT reports orders for each quarter. The good news for Q1 was that orders of $2.11 billion were well above revenue and up 31% from orders in Q4, as well as up 5% y/y.
Guidance is for Q2 fiscal 2013 revenue to be up 15 to 25% sequentially. Non-GAAP EPS is expected between $0.09 and $0.15.
While Applied Materials has substantial competition in each of the types of tools that are needed for semiconductor manufacturing, it is second in overall sales revenue only to ASML in an industry where scale matters. ASML is not much bigger: it had sales of $7.9 billion in 2011, AMAT had $7.4 billion. Another American competitor is KLA-Tencor, which had $3.1 billion in sales, placing it fourth globally.
On the whole, I think it is likely that 2013 will be a year of improvement for AMAT, and with major gearing up for 20 nm in 2014, that will be a very good year. How much improvement depends on the degree of strengthening global demand for semiconductor chips.
Disclaimer: I am a long-term investor in AMAT. I also am long AMD, but do not own any other company mentioned in this article. I will not buy or sell AMAT stock for one week following this article's publication date.
See also:
My main AMAT analyst conferences page.
My Q1 2013 AMAT analyst conference notes
www.appliedmaterials.com
Tuesday, August 28, 2012
Applied Materials Q3: Trend or Dip?
Applied Materials (AMAT), the semiconductor capital equipment maker, reported worse than expected revenue and earnings for fiscal Q3 when it reported on August 15, 2012. Contrast my story about Applied's Q1, where I said results came in better than expected because "a couple of large foundries placed unexpected orders and took delivery faster than expected on Q4 orders. Most of this unexpected bonus was to fabricate mobile application processors, which are the hearts of tablet computers and smartphones."
What are investors to make of such quarterly fluctuations? Is AMAT in trouble, or is was Q3 just a small bump in the road?
Capital equipment of any kind can be very cyclical and sensitive to changes in ultimate product demand. If end-market demand is not increasing factories (in this case foundries) don't need to add more equipment to keep up with demand. In semiconductors this is somewhat mitigated by the constant shrinking of transistor sizes, but that also comes in cycles, with Intel typically doing the first shrink and everyone else catching up later depending on their specific product needs, usually new product introductions.
The numbers tell the overall story of Q3 (which ended July 29). Revenues were $2.34 billion, down 8% sequentially from $2.54 billion and down 17% from $2.79 billion in the year-earlier quarter. GAAP Net income was $218 million, down 25% sequentially from $289 million and down 54% from $476 million year-earlier. GAAP EPS (earnings per share) were $0.17, down 23% sequentially from $0.22 and down 53% from $0.36 year-earlier.
Note that profits were substantial even at this level of revenue. This may not be the very bottom of the current cycle, but it is probably pretty close.
Foundries were cautious ordering in the quarter, prefering to risk not being able to produce enough chips in Q4 if demand is greater than expected. The same seems to be true throughout the semiconductor industry lately, with everyone trying to keep inventories low in case demand in Europe or China sinks further.
Management reported that much of the equipment is being sold to manufacture chips for mobile devices, but as device sales are seasonal, semiconductor fab equipment sales are starting to show more annual seasonality than in the past. The industry is moving to 28 nm based mobile devices, so even without global demand expansion 28 nm capacity has to be added (at 28 nm smartphone makers can get more computing capacity while extending battery life).
Applied Materials is also suffering from its display equipment segment, as display factories have plenty of capacity. However, new technologies will likely be introduced in 2013. Similarly its solar equipment sales were minimal as factories in China are able to meet short term demand for solar cells. Prices have dropped enough that demand should gradually pick up the slack caused by overproduction, despite new U.S. punitive tariffs. In addition, there has been talk of Applied selling its solar division. That makes no sense to me, it would make more sense to at least hold onto it until demand returns, when it would fetch a considerably better price.
One strong point for Applied during demand dips is its services division. Old equipment needs maintenance. Services revenue was $579 million, up 5% in the quarter.
Of course if the global economy melts down even bonds and gold will be worthless, but the most likely scenario for Applied Materials is for stronger growth in late 2012 and into 2013. This will be driven by returning demand for display and solar manufacturing equipment, as well as the more complicated (and expensive) equipment lines needed to manufacturer semiconductor chips and 28 nm and below.
AMAT has a number of competitors, but loss of market share has not been an issue. Applied spent $209 million on research and development in the quarter and has a healthy pipeline of new and future products.
For more details about Q3 results, including questions by analysts, see my Applied Materials Q3 2012 Analyst Call notes.
If you are a long-term investor in Applied Materials you can still do what I do, taking advantage of the mistakes of short-termers. We know revenue of from sales of expensive pieces of capital equipment will be cyclic. In the long run the cycles don't matter to much, only the long-term trend and dividends. On down legs the stock tends to be underpriced, and at least in bull markets on the upward portion of cycles the stock may get overpriced. Buy low, sell high. There are always people doing the opposite who will be happy to trade with you.
AMAT stock ended yesterday at , giving it a market capitalization near $14.3 billion. Its 52 week low was $9.70 on October 4, 2011, and its 52 week high was $13.94 on February 17. It pays $0.09 per quarter in dividends, making its yield today 3.1%.
Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I will not trade in AMAT for at least 7 days after this article is published.
See also the Applied Materials web site.
And keep diversified!
What are investors to make of such quarterly fluctuations? Is AMAT in trouble, or is was Q3 just a small bump in the road?
Capital equipment of any kind can be very cyclical and sensitive to changes in ultimate product demand. If end-market demand is not increasing factories (in this case foundries) don't need to add more equipment to keep up with demand. In semiconductors this is somewhat mitigated by the constant shrinking of transistor sizes, but that also comes in cycles, with Intel typically doing the first shrink and everyone else catching up later depending on their specific product needs, usually new product introductions.
The numbers tell the overall story of Q3 (which ended July 29). Revenues were $2.34 billion, down 8% sequentially from $2.54 billion and down 17% from $2.79 billion in the year-earlier quarter. GAAP Net income was $218 million, down 25% sequentially from $289 million and down 54% from $476 million year-earlier. GAAP EPS (earnings per share) were $0.17, down 23% sequentially from $0.22 and down 53% from $0.36 year-earlier.
Note that profits were substantial even at this level of revenue. This may not be the very bottom of the current cycle, but it is probably pretty close.
Foundries were cautious ordering in the quarter, prefering to risk not being able to produce enough chips in Q4 if demand is greater than expected. The same seems to be true throughout the semiconductor industry lately, with everyone trying to keep inventories low in case demand in Europe or China sinks further.
Management reported that much of the equipment is being sold to manufacture chips for mobile devices, but as device sales are seasonal, semiconductor fab equipment sales are starting to show more annual seasonality than in the past. The industry is moving to 28 nm based mobile devices, so even without global demand expansion 28 nm capacity has to be added (at 28 nm smartphone makers can get more computing capacity while extending battery life).
Applied Materials is also suffering from its display equipment segment, as display factories have plenty of capacity. However, new technologies will likely be introduced in 2013. Similarly its solar equipment sales were minimal as factories in China are able to meet short term demand for solar cells. Prices have dropped enough that demand should gradually pick up the slack caused by overproduction, despite new U.S. punitive tariffs. In addition, there has been talk of Applied selling its solar division. That makes no sense to me, it would make more sense to at least hold onto it until demand returns, when it would fetch a considerably better price.
One strong point for Applied during demand dips is its services division. Old equipment needs maintenance. Services revenue was $579 million, up 5% in the quarter.
Of course if the global economy melts down even bonds and gold will be worthless, but the most likely scenario for Applied Materials is for stronger growth in late 2012 and into 2013. This will be driven by returning demand for display and solar manufacturing equipment, as well as the more complicated (and expensive) equipment lines needed to manufacturer semiconductor chips and 28 nm and below.
AMAT has a number of competitors, but loss of market share has not been an issue. Applied spent $209 million on research and development in the quarter and has a healthy pipeline of new and future products.
For more details about Q3 results, including questions by analysts, see my Applied Materials Q3 2012 Analyst Call notes.
If you are a long-term investor in Applied Materials you can still do what I do, taking advantage of the mistakes of short-termers. We know revenue of from sales of expensive pieces of capital equipment will be cyclic. In the long run the cycles don't matter to much, only the long-term trend and dividends. On down legs the stock tends to be underpriced, and at least in bull markets on the upward portion of cycles the stock may get overpriced. Buy low, sell high. There are always people doing the opposite who will be happy to trade with you.
AMAT stock ended yesterday at , giving it a market capitalization near $14.3 billion. Its 52 week low was $9.70 on October 4, 2011, and its 52 week high was $13.94 on February 17. It pays $0.09 per quarter in dividends, making its yield today 3.1%.
Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I will not trade in AMAT for at least 7 days after this article is published.
See also the Applied Materials web site.
And keep diversified!
Thursday, April 12, 2012
Opportunities in Data Storage: Seagate, Western Digital, and Marvell
Because I own stock in Marvell Technologies (MRVL), which gets about half of its revenue from sales of HDD controller chips, I read a detailed interview with Steve Luczo, the CEO of Seagate Technology (STX) [See Seagate CEO Interview at Forbes]. Seagate is one of only 2 remaining major hard disk drive (HDD) manufacturers. The other is Western Digital (WDC). While I already agreed with the overall HDD story, Steve made some very good points that I had not thought of or heard before.
In addition to MRVL and STX, I'll be discussing semiconductor manufacturing capital equipment makers Applied Materials (AMAT) and KLA (KLAC) as well as Dot Hill (HILL), EMC, AMD, and Intel (INTC).
Let's tackle the Thailand flooding aftermath before taking on long-term trends. Industry-wide, quarterly unit sales were projected to be 180 million before the floods hit. Instead Q4 2011 production was 120 million units. Q1 production rose to 140 million units, Q2 expectations are 160 million units, and Q3 should be back to 180 million. If there are still shortages, Q4 could see between 180 and 200 million units produced.
In addition, as the year progresses industry average drive capacity will increase as new, high-capacity equipment replaces older machines damaged by the flooding.
For makers of parts that go into the drives, that is good news. It is also good news for PC and server manufacturers (and suppliers like AMD and Intel (INTC)) that have been constrained by HDD shortages. In Marvell's case, they report quarters with a one-month lag and also ship pre-production. That means that Marvell is currently in a quarter that runs February to April. April chips will go in May HDDs, so run rates should be pretty good by then. It is possible that Marvell's July quarter will be back to record HDD controller chip shipments.
Overall expectations are that once we get past Q1, this should be a banner year for almost everyone in the storage industry, with good margins (because shortages will persist) and unit shipments improving markedly in the second half.
But aren't Solid State Drives (SSD's) going to replace HDDs, which are not used in tablet computers, smartphones, or possibly in thin and light notebook models? Should investors continue to flee the entire HDD industry? Why else, except investor flight, would Seagate have a forward P/E of just 4.1?
Luczo does not think so. The anti-HDD argument that has been around investor circles for some time is that as SSDs become mass-market, and technologies shrink, SSD capacities will go up, prices will come down, and HDD demand will decline in short order.
The typical counter argument is that data storage requirements are based on the expanding storage needs of the world. Storage is a volume business, so while SSDs may provide speed, HDDs need to continue to improve both capacity and units shipped just to keep up with expanding volumes of data, particularly video data. For every iPad there has to be disk capacity in the cloud somewhere, because iPads mostly need to connect to data stored on disks in the cloud to be useful.
The stronger argument is this: semiconductor fabs cannot be built fast enough to make the SSD replacing HDD dream come true, not anytime soon, if ever.
A new semiconductor fab (factory) is a very expensive investment at $10 billion. If the chips produced by the fabs (in this case mainly memory chips) are not expensive enough, building a new fab is a money loser. In effect the prices for chips are set by the capital required to build the fabs.
It is much, much cheaper to add data storage production capacity, on a byte basis, by building new HDD factories than by building new semi fabs. The same data capacity expansion could be achieved with less than $1 billion in capital, Thus HDDs will have a considerable price advantage for the reasonably visible future.
Technology investors have learned that when a technology is dying, you might as well exit. Some companies role well from one technology generation to another, as Intel has. But the point here is that the HDD industry is not dying. The SSD industry can grow rapidly for an entire decade and the HDD industry will still be far larger at the end of the decade than it is today, and than the SSD industry will be. Of course many companies will play both sides of the SSD/HDD game, and hybrid drives are already available.
But suppose Luczo is wrong in the sense that chip manufacturers do decide to invest rapidly in fabs to drive as much SSD expansion as quickly as possible. I still think Seagate is undervalued in that scenario, but there would be other winners. The obvious ones are the semiconductor equipment manufacturers whose machines make the silicon wafers and create the tiny transistors that make up Flash memory. There are still a number of companies in this category, but as capital requirements increase this segment is consolidating as well. Two big players that should gain from SSD fab accelerations are Applied Materials (which recently acquired Varian), and KLA-Tencor. Both currently have attractive P/Es that do not reflect any future boom in the SSD industry.
Meanwhile data storage equipment makers from giants like EMC and HP to specialists like Dot Hill should continue to do well, since the systems they manufacture can accommodate both SSDs and HDDs, depending on the needs of the end customers.
Disclaimer: I own MRVL, AMAT, and HILL. I do not own STX, WDS, KLA, INTC, or EMC. I won't trade in any of these stocks for 3 days after this article is published.
Keep diversified!
In addition to MRVL and STX, I'll be discussing semiconductor manufacturing capital equipment makers Applied Materials (AMAT) and KLA (KLAC) as well as Dot Hill (HILL), EMC, AMD, and Intel (INTC).
Let's tackle the Thailand flooding aftermath before taking on long-term trends. Industry-wide, quarterly unit sales were projected to be 180 million before the floods hit. Instead Q4 2011 production was 120 million units. Q1 production rose to 140 million units, Q2 expectations are 160 million units, and Q3 should be back to 180 million. If there are still shortages, Q4 could see between 180 and 200 million units produced.
In addition, as the year progresses industry average drive capacity will increase as new, high-capacity equipment replaces older machines damaged by the flooding.
For makers of parts that go into the drives, that is good news. It is also good news for PC and server manufacturers (and suppliers like AMD and Intel (INTC)) that have been constrained by HDD shortages. In Marvell's case, they report quarters with a one-month lag and also ship pre-production. That means that Marvell is currently in a quarter that runs February to April. April chips will go in May HDDs, so run rates should be pretty good by then. It is possible that Marvell's July quarter will be back to record HDD controller chip shipments.
Overall expectations are that once we get past Q1, this should be a banner year for almost everyone in the storage industry, with good margins (because shortages will persist) and unit shipments improving markedly in the second half.
But aren't Solid State Drives (SSD's) going to replace HDDs, which are not used in tablet computers, smartphones, or possibly in thin and light notebook models? Should investors continue to flee the entire HDD industry? Why else, except investor flight, would Seagate have a forward P/E of just 4.1?
Luczo does not think so. The anti-HDD argument that has been around investor circles for some time is that as SSDs become mass-market, and technologies shrink, SSD capacities will go up, prices will come down, and HDD demand will decline in short order.
The typical counter argument is that data storage requirements are based on the expanding storage needs of the world. Storage is a volume business, so while SSDs may provide speed, HDDs need to continue to improve both capacity and units shipped just to keep up with expanding volumes of data, particularly video data. For every iPad there has to be disk capacity in the cloud somewhere, because iPads mostly need to connect to data stored on disks in the cloud to be useful.
The stronger argument is this: semiconductor fabs cannot be built fast enough to make the SSD replacing HDD dream come true, not anytime soon, if ever.
A new semiconductor fab (factory) is a very expensive investment at $10 billion. If the chips produced by the fabs (in this case mainly memory chips) are not expensive enough, building a new fab is a money loser. In effect the prices for chips are set by the capital required to build the fabs.
It is much, much cheaper to add data storage production capacity, on a byte basis, by building new HDD factories than by building new semi fabs. The same data capacity expansion could be achieved with less than $1 billion in capital, Thus HDDs will have a considerable price advantage for the reasonably visible future.
Technology investors have learned that when a technology is dying, you might as well exit. Some companies role well from one technology generation to another, as Intel has. But the point here is that the HDD industry is not dying. The SSD industry can grow rapidly for an entire decade and the HDD industry will still be far larger at the end of the decade than it is today, and than the SSD industry will be. Of course many companies will play both sides of the SSD/HDD game, and hybrid drives are already available.
But suppose Luczo is wrong in the sense that chip manufacturers do decide to invest rapidly in fabs to drive as much SSD expansion as quickly as possible. I still think Seagate is undervalued in that scenario, but there would be other winners. The obvious ones are the semiconductor equipment manufacturers whose machines make the silicon wafers and create the tiny transistors that make up Flash memory. There are still a number of companies in this category, but as capital requirements increase this segment is consolidating as well. Two big players that should gain from SSD fab accelerations are Applied Materials (which recently acquired Varian), and KLA-Tencor. Both currently have attractive P/Es that do not reflect any future boom in the SSD industry.
Meanwhile data storage equipment makers from giants like EMC and HP to specialists like Dot Hill should continue to do well, since the systems they manufacture can accommodate both SSDs and HDDs, depending on the needs of the end customers.
Disclaimer: I own MRVL, AMAT, and HILL. I do not own STX, WDS, KLA, INTC, or EMC. I won't trade in any of these stocks for 3 days after this article is published.
Keep diversified!
Saturday, February 18, 2012
Applied Materials Q1 Boosted by Mobile Demand
Applied Materials (AMAT), the semiconductor capital equipment maker, reported better than expected revenue and earnings Thursday for its first quarter fiscal 2012 ending January 30, 2012. Although the stock traded up after-hours on Thursday, by the end of day Friday it closed at $12.99, down $0.22 or 1.7% from the Thursday close.
Last quarter Applied management stated they believed they were past the bottom of the order cycle, but that revenues were not likely to start increasing until the second half of 2012. The lag is because semiconductor equipment is not made until after it is ordered, and customers sometimes place orders well in advance of their required delivery times.
Prior guidance was that Q1 revenue would be down 5% to 15% sequentially. Q1 Revenue were $2.19 billion, up 0.5% sequentially from $2.18 billion. Despite that revenue was down 18.5% from $2.69 billion in the year-earlier quarter.
The difference between guidance and results was mostly because a couple of large foundries (plants where semiconductor chips are manufactured) placed unexpected orders and took delivery faster than expected on Q4 orders. Most of this unexpected bonus was to fabricate mobile application processors, which are the hearts of tablet computers and smartphones. These processors are becoming more complicated, often adding computer cores as well as peripheral functions. This means die sizes become larger, so more dies must be processed, and more equipment lines installed. The number of units of smartphones and tablets sold globally is also expanding rapidly.
Two other Applied Materials segments, display technology and solar, did poorly as expected and are not believed likely to recover much in 2012.
Which brings us back to the question of where we are in the cycle. To some extent that depends on the global economy. It is also sector-specific, as capacity utilization and end demand growth differ for sectors like RAM, Flash memory, application-specific chips and display technology. Growth comes in two forms: more equipment to pump out more units, and new equipment for chips that work with smaller transistors.
In addition to continued strong demand for mobile-specific devices, PC demand is expected to rebound in 2012 as the hard-drive shortage bottleneck disappears. In addition, Windows 8 could be a driver if it releases as expected this Fall.
While we are probably now past the bottom of the order cycle for semiconductor production equipment, the exact nature and extent of the ramp remains to be seen. Guidance for Q2 is for revenues to be up sequentially between 5% and 15%. We are far enough into Q2, and enough shipments were ordered back in Q1 or even Q4, that investors can probably count on that.
Since (at Friday's closing price) Applied pays a dividend of 2.42% ($0.08 per quarter), I see Applied Materials as one of the safest technology stocks to invest in. Earnings in Q1 were $0.09 GAAP, $0.19 non-GAAP, so even in a slow quarter there was plenty of cash generated to cover the dividend. Despite using $4.2 billion to acquire Varian in the quarter, Applied's cash balance ended near $3 billion.
Despite unevenness, we are still in a global economic ramp with billions of consumers set to acquire smartphones in the next 3 years (600 million in China alone). Everyone wants devices that do more with less power, and the only way to get that is with new semiconductor manufacturing capabilities. It does not matter who wins the smartphone race; everyone needs the kind of semiconductor manufacturing solutions Applied Materials (and its competitors) provide.
I am also excited about Applied's acquisition of Varian, but I'll save that for a different article.
For more details about Q1 results, including questions by analysts, see my Applied Materials Q1 2012 Analyst Call summary.
Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I will not trade in AMAT for at least 7 days after this article is published.
And keep diversified!
Last quarter Applied management stated they believed they were past the bottom of the order cycle, but that revenues were not likely to start increasing until the second half of 2012. The lag is because semiconductor equipment is not made until after it is ordered, and customers sometimes place orders well in advance of their required delivery times.
Prior guidance was that Q1 revenue would be down 5% to 15% sequentially. Q1 Revenue were $2.19 billion, up 0.5% sequentially from $2.18 billion. Despite that revenue was down 18.5% from $2.69 billion in the year-earlier quarter.
The difference between guidance and results was mostly because a couple of large foundries (plants where semiconductor chips are manufactured) placed unexpected orders and took delivery faster than expected on Q4 orders. Most of this unexpected bonus was to fabricate mobile application processors, which are the hearts of tablet computers and smartphones. These processors are becoming more complicated, often adding computer cores as well as peripheral functions. This means die sizes become larger, so more dies must be processed, and more equipment lines installed. The number of units of smartphones and tablets sold globally is also expanding rapidly.
Two other Applied Materials segments, display technology and solar, did poorly as expected and are not believed likely to recover much in 2012.
Which brings us back to the question of where we are in the cycle. To some extent that depends on the global economy. It is also sector-specific, as capacity utilization and end demand growth differ for sectors like RAM, Flash memory, application-specific chips and display technology. Growth comes in two forms: more equipment to pump out more units, and new equipment for chips that work with smaller transistors.
In addition to continued strong demand for mobile-specific devices, PC demand is expected to rebound in 2012 as the hard-drive shortage bottleneck disappears. In addition, Windows 8 could be a driver if it releases as expected this Fall.
While we are probably now past the bottom of the order cycle for semiconductor production equipment, the exact nature and extent of the ramp remains to be seen. Guidance for Q2 is for revenues to be up sequentially between 5% and 15%. We are far enough into Q2, and enough shipments were ordered back in Q1 or even Q4, that investors can probably count on that.
Since (at Friday's closing price) Applied pays a dividend of 2.42% ($0.08 per quarter), I see Applied Materials as one of the safest technology stocks to invest in. Earnings in Q1 were $0.09 GAAP, $0.19 non-GAAP, so even in a slow quarter there was plenty of cash generated to cover the dividend. Despite using $4.2 billion to acquire Varian in the quarter, Applied's cash balance ended near $3 billion.
Despite unevenness, we are still in a global economic ramp with billions of consumers set to acquire smartphones in the next 3 years (600 million in China alone). Everyone wants devices that do more with less power, and the only way to get that is with new semiconductor manufacturing capabilities. It does not matter who wins the smartphone race; everyone needs the kind of semiconductor manufacturing solutions Applied Materials (and its competitors) provide.
I am also excited about Applied's acquisition of Varian, but I'll save that for a different article.
For more details about Q1 results, including questions by analysts, see my Applied Materials Q1 2012 Analyst Call summary.
Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I will not trade in AMAT for at least 7 days after this article is published.
And keep diversified!
Friday, December 9, 2011
Applied Materials See Cycle Bottom
Applied Materials (AMAT), the semiconductor capital equipment maker, had a very difficult fourth quarter of fiscal 2011 ending October 30th. The stock is trading trading today around $11.20 per share, less than 8 times earnings and not that much above its 52 week low of $9.70 touched on October 4.
Yet revenue for the fiscal year set a record. Applied Materials and other semiconductor equipment makers tend to be very cyclical because demand for new equipment is only strong when semiconductor end use is ramping. It looked like calendar 2011 would continue to be part of a strong up cycle that started in 2010, but global economic turmoil and weak consumer electronics end demand has made chip makers and the foundries that serve fabless chip makers reluctant to increase capacity.
Sales continue because even during slow periods there are advantages to moving to new process technologies that put more transistors on any given area of chip surface. Applied Materials also derives considerable revenue from related services. Its services division contributed $629 million in revenue in the quarter.
Total Q4 revenue was $2.18 billion, down 22% sequentially from $2.79 billion and down 25% from $2.89 billion in the year-earlier quarter. GAAP net income was $456 million, down 4% sequentially from $476 million and down 3% from $468 million year-earlier. GAP EPS (earnings per share) were $0.34, down 6% sequentially from $0.36 and down 3% from $0.35 year-earlier.
Non-GAAP net income was $271 million, down sequentially from $467 million and also down from $476 million year-earlier. EPS $0.21. The vastly lower non-GAAP than GAAP earnings were mostly due to a $203 adjustment to the prior-year's income tax filings.
Despite the poor quarter, cash flow from operations was near $700, or about $425 million excluding the income tax refund. Cash and equivalents were over $7 billion.
The stock pays a dividend of $8 per quarter per share. Management reiterated that they are committed to increasing the dividend, but stock buy backs are the preferred method of returning profits to shareholders. The acquisition of Varian Semiconductor will put a temporary crimp in cash, but is a good long-term move.
Which brings us back to the question of where we are in the cycle. To some extent that depends on the global economy. It is also sector-specific, as capacity utilization and end demand growth differ for sectors like RAM, Flash memory, application-specific chips and display technology.
Applied Materials management has had decades of experience with these cycles. They expect the first half of their fiscal year 2012 to be difficult. In particular Q1 fiscal 2012 (ending January 30th) guidance was for revenues down sequentially another 5% to 15%. However, they believe they are already past the bottom of the order cycle. Because we are talking about capital equipment, when the order cycle starts trending upward it can be six months before actual revenues start trending back up.
Flash and mobile processor capacity utilization are already high, so any further increase in demand should generate equipment orders. However, RAM capacity is plentiful, so we probably won't see a big uptick in revenues until demand catches up to capacity in that segment, probably later in 2012.
Despite unevenness, we are still in a global economic ramp with billions of consumers set to acquire smartphones in the next 3 years (600 million in China alone). Everyone wants devices that do more with less power, and the only way to get that is with new semiconductor manufacturing capabilities. It does not matter who wins the smartphone race; everyone needs the kind of semiconductor manufacturing solutions Applied Materials provides.
For more details about Q4 results, including questions by analysts, see my Applied Materials Q4 2011 Analyst Call summary.
Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I have no plans to change my position anytime soon.
See also: www.appliedmaterials.com
And keep diversified!
Yet revenue for the fiscal year set a record. Applied Materials and other semiconductor equipment makers tend to be very cyclical because demand for new equipment is only strong when semiconductor end use is ramping. It looked like calendar 2011 would continue to be part of a strong up cycle that started in 2010, but global economic turmoil and weak consumer electronics end demand has made chip makers and the foundries that serve fabless chip makers reluctant to increase capacity.
Sales continue because even during slow periods there are advantages to moving to new process technologies that put more transistors on any given area of chip surface. Applied Materials also derives considerable revenue from related services. Its services division contributed $629 million in revenue in the quarter.
Total Q4 revenue was $2.18 billion, down 22% sequentially from $2.79 billion and down 25% from $2.89 billion in the year-earlier quarter. GAAP net income was $456 million, down 4% sequentially from $476 million and down 3% from $468 million year-earlier. GAP EPS (earnings per share) were $0.34, down 6% sequentially from $0.36 and down 3% from $0.35 year-earlier.
Non-GAAP net income was $271 million, down sequentially from $467 million and also down from $476 million year-earlier. EPS $0.21. The vastly lower non-GAAP than GAAP earnings were mostly due to a $203 adjustment to the prior-year's income tax filings.
Despite the poor quarter, cash flow from operations was near $700, or about $425 million excluding the income tax refund. Cash and equivalents were over $7 billion.
The stock pays a dividend of $8 per quarter per share. Management reiterated that they are committed to increasing the dividend, but stock buy backs are the preferred method of returning profits to shareholders. The acquisition of Varian Semiconductor will put a temporary crimp in cash, but is a good long-term move.
Which brings us back to the question of where we are in the cycle. To some extent that depends on the global economy. It is also sector-specific, as capacity utilization and end demand growth differ for sectors like RAM, Flash memory, application-specific chips and display technology.
Applied Materials management has had decades of experience with these cycles. They expect the first half of their fiscal year 2012 to be difficult. In particular Q1 fiscal 2012 (ending January 30th) guidance was for revenues down sequentially another 5% to 15%. However, they believe they are already past the bottom of the order cycle. Because we are talking about capital equipment, when the order cycle starts trending upward it can be six months before actual revenues start trending back up.
Flash and mobile processor capacity utilization are already high, so any further increase in demand should generate equipment orders. However, RAM capacity is plentiful, so we probably won't see a big uptick in revenues until demand catches up to capacity in that segment, probably later in 2012.
Despite unevenness, we are still in a global economic ramp with billions of consumers set to acquire smartphones in the next 3 years (600 million in China alone). Everyone wants devices that do more with less power, and the only way to get that is with new semiconductor manufacturing capabilities. It does not matter who wins the smartphone race; everyone needs the kind of semiconductor manufacturing solutions Applied Materials provides.
For more details about Q4 results, including questions by analysts, see my Applied Materials Q4 2011 Analyst Call summary.
Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I have no plans to change my position anytime soon.
See also: www.appliedmaterials.com
And keep diversified!
Saturday, May 28, 2011
Applied Materials Rocks Q2
Applied Materials, the semiconductor capital equipment maker, reported stronger than expected revenues and earnings for its second quarter of fiscal 2011 ending May1. The stock traded down on Friday based on management's cautious guidance for the remainder of 2011.
Prior guidance had been for Q2 sequentially flat to up 5% from Q1 revenues of $2.69 billion, with non-GAAP EPS of $0.34 to $0.38. Instead revenues came in at $2.86 billion, up 7% sequentially from $2.69 billion, and up 25% from $2.30 billion in the year-earlier quarter. Non-GAAP EPS was at the high end of guidance, $0.38.
Prior guidance on full fiscal 2011 revenues was over $11 billion and non-GAAP EPS was over $1.50. Management now said that is the high end of a range that depends on demand in Q3 and Q4.
The dividend is now 8 cents per quarter, 32 cents per year. There is a lot of room for growth given EPS, but acquiring Varian Semiconductor will eat up much of Applied's $4.6 billion cash and investment balance. Once Varian is digested the dividend could start growing again. At Friday's closing stock price the current dividend is a healthy 2.35%.
Within the semiconductor equipment and servicing industry Applied Materials serves a variety of segments. Variations in the demand cycles in segments and sub-segments account both for the stellar quarter and for the cautious guidance. The solar power division set a record, but revenues exceeded new orders as there are questions about end demand in Europe. Orders exceeded sales in the largest segment, silicon semiconductor manufacturing equipment, but the orders are mostly in new process modes (40 nm and under), driven by mobile end market demand. Large panel display capacity is plentiful, so most orders are to make small panels for smartphones and tablets.
My own view is that there is mainly upside. The Varian Semiconductor acquisition will make Applied very close to a full service provider for foundries. Despite uneveness, we are still in a global economic ramp with billions of consumers set to acquire smartphones in the next 3 years (600 million in China alone). Everyone wants devices that do more with less power, and the only way to get that is with new semiconductor manufacturing capabilities. It does not matter who wins the smartphone race; everyone needs the kind of semiconductor solutions Applied Materials provides.
For more details about Q2 results, including questions by analysts, see my Applied Materials Q2 2011 Analyst Call summary.
I own Applied Materials (AMAT) stock. See also the Applied Materials web site.
See also: http://www.appliedmaterials.com/
Wednesday, March 2, 2011
Applied Materials: Value, Growth, and Tablets
Applied Materials (AMAT), the semiconductor capital equipment maker, reported stronger than expected revenues and earnings for its first quarter of fiscal 2011 ending January 31, 2011. Revenue growth was up 45% year over year. Yet its PE (price/earnings) ratio is far lower than most technology stocks with similar growth records.
Trying to place a bet on tablet computers or smart phones? You can bet on the brands like Apple, Motorola, and Samsung. Or you can bet on the companies that supply the chips to make the tablets work, for instance, Qualcomm, TI, NVIDIA, Marvell and others. These are all pretty well known companies, but who really knows who consumers will be in love with in 2 years? Who knows whose chips two years from now will be winning the majority of slots in the new machines?
One thing you can pretty much count on: the constituent parts for tablet computers will be manufactured by someone. When it comes to actually making the silicon, Applied Materials is the dominant supplier of the necessary equipment.
In 2008 and 2009 Applied Materials had a rough time. No new capacity was needed; even shrinks (to smaller transistor sizes) were put off as long as possible. But because the company was well managed and had plenty of cash, it navigated successfully through the recession.
In 2010 Applied came roaring back as fabrication companies started making up for lost time.
Are people going to be satisfied with the computational or memory powers of 2010 style tablets and smart phones? No. The ARM processors are (so far) no match for the silicon from AMD or Intel that is available in a desktop or notebook computer. People may want portability, but they still want highly capable, fast machines. That means cramming more transistors onto chips, and using new technologies that keep voltage and power requirements down. In turn, to achieve that, the fabs need new machines capable of imprinting silicon with ever smaller patterns.
As reported in the Applied Materials February 24, 2011 analyst conference call, different aspects of the industry are at different points in their supply demand cycle. Fortunately overall the cycle is heading up. Display equipment sales will likely be weak in 2011, in part because tablet and smart phone displays are so much smaller than monitor and TV displays. But demand for most major types of silicon chips is headed up, as is demand for the equipment used to make crystalline silicon solar cells.
With $0.38 per share GAAP earnings in Q1 and about the same expected in Q2, it is fair to guess that fiscal 2011 earning will indeed hit at least $1.50 per share, which is AMAT's guidance.
While growth in 2011 won't be as strong as in 2010, I still see Applied's PE rising eventually to about 20. That would put it at $30 per share and still give it a 5% earnings return. As I write this you can buy the stock for just $16.36 per share. Note too that Applied has plenty of cash and pays a $0.28 annual dividend. I'd like to see that dividend raised to something more like a third of earnings, but other than that I think Applied Materials is a great company for stock holders.
See also: www.appliedmaterials.com
Trying to place a bet on tablet computers or smart phones? You can bet on the brands like Apple, Motorola, and Samsung. Or you can bet on the companies that supply the chips to make the tablets work, for instance, Qualcomm, TI, NVIDIA, Marvell and others. These are all pretty well known companies, but who really knows who consumers will be in love with in 2 years? Who knows whose chips two years from now will be winning the majority of slots in the new machines?
One thing you can pretty much count on: the constituent parts for tablet computers will be manufactured by someone. When it comes to actually making the silicon, Applied Materials is the dominant supplier of the necessary equipment.
In 2008 and 2009 Applied Materials had a rough time. No new capacity was needed; even shrinks (to smaller transistor sizes) were put off as long as possible. But because the company was well managed and had plenty of cash, it navigated successfully through the recession.
In 2010 Applied came roaring back as fabrication companies started making up for lost time.
Are people going to be satisfied with the computational or memory powers of 2010 style tablets and smart phones? No. The ARM processors are (so far) no match for the silicon from AMD or Intel that is available in a desktop or notebook computer. People may want portability, but they still want highly capable, fast machines. That means cramming more transistors onto chips, and using new technologies that keep voltage and power requirements down. In turn, to achieve that, the fabs need new machines capable of imprinting silicon with ever smaller patterns.
As reported in the Applied Materials February 24, 2011 analyst conference call, different aspects of the industry are at different points in their supply demand cycle. Fortunately overall the cycle is heading up. Display equipment sales will likely be weak in 2011, in part because tablet and smart phone displays are so much smaller than monitor and TV displays. But demand for most major types of silicon chips is headed up, as is demand for the equipment used to make crystalline silicon solar cells.
With $0.38 per share GAAP earnings in Q1 and about the same expected in Q2, it is fair to guess that fiscal 2011 earning will indeed hit at least $1.50 per share, which is AMAT's guidance.
While growth in 2011 won't be as strong as in 2010, I still see Applied's PE rising eventually to about 20. That would put it at $30 per share and still give it a 5% earnings return. As I write this you can buy the stock for just $16.36 per share. Note too that Applied has plenty of cash and pays a $0.28 annual dividend. I'd like to see that dividend raised to something more like a third of earnings, but other than that I think Applied Materials is a great company for stock holders.
See also: www.appliedmaterials.com
Friday, November 19, 2010
HILL, DNDN, ONXX, SGI, MCHP, NVDA, AMAT
I have gotten terribly behind, this is hardly a log at all of late ...
Here are links to my summaries of recent Q3 analyst conference calls. Lots of interesting stuff, but I am unlikely to do separate commentary on all of them.
Dot Hill Q3 2010 Analyst Conference Call Summary. First quarter with non-GAAP profits in some time, appears to be on a good projectory with new storage products.
Dendreon Q3 2010 Analyst Conference Call Summary. About as expected, ramped up Provenge sales to the max until they get facility expansion permission.
Onyx Pharmaceuticals Q3 2010 Analyst Conference Call Summary. An exceptional quarter due to a large upfront payment from Japan.
SGI Q3 2010 Analyst Conference Call Summary. Still in the red, but new supercomputer sales are ramping rapidly.
Microchip Q3 2010 Analyst Conference Call Summary. Excellent revenues and profits.
NVIDIA Q3 2010 Analyst Conference Call Summary. Promises of Tegra revenues from future products.
Applied Materials Q3 2010 Analyst Conference Call Summary. Excellent quarter, demand for semiconductor manufacturing equipment remains strong, even the solar division was in the black.
Marvell is way up today after great results reported yesterday. If you think this was a good quarter, wait until revenues for chips for the new smartphones in China kick in next year. See Marvell Q3 2010 Analyst Call Summary.
Monday, August 23, 2010
Applied Materials Q3 2010 Guidance
On August 18th Applied Materials (AMAT) released Q2 results and held the analyst conference call for the quarter. For those trying to see where the electronics industry is heading, it was an important call.
Consumers choosing new computers, smartphones, and big screen displays recognize a limited number of brand name device makers like Apple, HP, Sony, Dell, Nokia, etc. Each of their devices is engineered from a number of components including the casings, displays, and electronic parts. A wide variety of semiconductor parts makers like Intel, AMD, Broadcom, Qualcomm, Marvell, TI, etc., compete to be chosen by the device maker; those are the design wins that point to whether a semiconductor company will grow or fade.
The semiconductor chips themselves are made with specialty capital equipment that must lay down the microscopic circuits that make the magic happen. Every few years the size of the circuit elements decreases, so fabs (after fabrication factories) must buy new capital equipment to provide for cutting edge chip production. A number of steps and hence machines are involved in the process for creating silicon wafers, cleaning, making masks, infusing them with dopants, adding insulators, etching, etc., and testing. As you may have heard lately from, for instance, NVIDIA, when new machines start to come online it often takes time to get them working well enough that the number of defects decreases to the point that most of the chips work when tested.
Applied Materials makes equipment to make semiconductor chips, solar panels, and LCD display panels. 2009 was a dry year. With end consumer (including industrial consumers) demand down for electronic devices, the fabs had plenty of capacity. Orders to AMAT consisted mainly of a few forward-looking fabs that knew that they had to keep shrinking transistors to serve their clients with the most advanced technological needs.
2010, on the other hand, has seen enough return of demand to restart the cycle for Applied. A lot of older production technology was taken off line in 2009. Now most fabs need not just new technology but capacity expansion as well.
Applied Materials has competition in each of its lines, some more so than others. With revenues of $2.52 billion in Q2 2010, up 10% sequentially from $2.30 billion and up 123% from $1.13 billion in Q2 2009, you can see the difference a year makes.
However, management is predicting that Q3 revenue will be flattish to up 5% over Q2. The main semiconductor equipment business is expected to be about flat. Services revenue looks up 10%. LCD display equipment revenue could be up 20%. But there will likely be a 10% to 20% drop in crystalline solar revenues. In addition the thin-film solar (SunFab) business is being reorganized because few governments, banks and companies wanted to take the risk of creating the very-large scale plants required for efficient thin-film operations.
Because fabs are scrambling to deal with current demand levels, a mild softening in the world economy would not cause them to put off plans to buy new equipment. In fact, it could take another year just to catch up. If, like me, you believe a gradual re-acceleration in the global economy is the most likely scenario, then this up cycle for Applied and other semiconductor equipment manufacturers is still in its opening phase.
If non-GAAP comes in at the middle of the guidance range, $0.30 per share, that would annualize to $1.20. At today's closing price of $10.99 per share, investors will be getting earnings of 10.9% per share. That sure beats the returns on bonds and CDs.
See also my notes on Applied Materials Q2 2010 analyst call;
Applied Materials site
Consumers choosing new computers, smartphones, and big screen displays recognize a limited number of brand name device makers like Apple, HP, Sony, Dell, Nokia, etc. Each of their devices is engineered from a number of components including the casings, displays, and electronic parts. A wide variety of semiconductor parts makers like Intel, AMD, Broadcom, Qualcomm, Marvell, TI, etc., compete to be chosen by the device maker; those are the design wins that point to whether a semiconductor company will grow or fade.
The semiconductor chips themselves are made with specialty capital equipment that must lay down the microscopic circuits that make the magic happen. Every few years the size of the circuit elements decreases, so fabs (after fabrication factories) must buy new capital equipment to provide for cutting edge chip production. A number of steps and hence machines are involved in the process for creating silicon wafers, cleaning, making masks, infusing them with dopants, adding insulators, etching, etc., and testing. As you may have heard lately from, for instance, NVIDIA, when new machines start to come online it often takes time to get them working well enough that the number of defects decreases to the point that most of the chips work when tested.
Applied Materials makes equipment to make semiconductor chips, solar panels, and LCD display panels. 2009 was a dry year. With end consumer (including industrial consumers) demand down for electronic devices, the fabs had plenty of capacity. Orders to AMAT consisted mainly of a few forward-looking fabs that knew that they had to keep shrinking transistors to serve their clients with the most advanced technological needs.
2010, on the other hand, has seen enough return of demand to restart the cycle for Applied. A lot of older production technology was taken off line in 2009. Now most fabs need not just new technology but capacity expansion as well.
Applied Materials has competition in each of its lines, some more so than others. With revenues of $2.52 billion in Q2 2010, up 10% sequentially from $2.30 billion and up 123% from $1.13 billion in Q2 2009, you can see the difference a year makes.
However, management is predicting that Q3 revenue will be flattish to up 5% over Q2. The main semiconductor equipment business is expected to be about flat. Services revenue looks up 10%. LCD display equipment revenue could be up 20%. But there will likely be a 10% to 20% drop in crystalline solar revenues. In addition the thin-film solar (SunFab) business is being reorganized because few governments, banks and companies wanted to take the risk of creating the very-large scale plants required for efficient thin-film operations.
Because fabs are scrambling to deal with current demand levels, a mild softening in the world economy would not cause them to put off plans to buy new equipment. In fact, it could take another year just to catch up. If, like me, you believe a gradual re-acceleration in the global economy is the most likely scenario, then this up cycle for Applied and other semiconductor equipment manufacturers is still in its opening phase.
If non-GAAP comes in at the middle of the guidance range, $0.30 per share, that would annualize to $1.20. At today's closing price of $10.99 per share, investors will be getting earnings of 10.9% per share. That sure beats the returns on bonds and CDs.
See also my notes on Applied Materials Q2 2010 analyst call;
Applied Materials site
Sunday, May 23, 2010
Applied Materials (AMAT) Sees Fab Expansions
Applied Materials (AMAT) had a great 2nd fiscal quarter ending May 1, 2010 as reported in its press release and at its analyst conference on May 19, 2010. However, its new amorphous silicon solar sub-segment has run into troubles, which is what most analysts and news stories focussed on. For detail of what the Applied Materials executives said, see my Applied Materials Q2 2010 analyst conference summary.
Overall revenues were up 24% from fiscal Q1 and 125% from Q2 2009. Year earlier was a bad quarter for Applied. As a capital equipment manufacturer (for the semiconductor industry) new orders nearly dried up, and it lost $0.19 per share. But Q2 2010 showed GAAP EPS of $0.20. That sounds like a growth company that should have a high PE multiplier. Partly there were probably some market share gains, but mainly the quick, recent growth is a result of the macro economic cycle.
There is also a technology cycle, where electronic device makers want to squeeze more intelligence into smaller areas of silicon. In 2009 almost all orders were driven by the need for technology upgrades. Now fabs (as semiconductor factories are known) are needing to expand capacity as well. About 60% of sales in the latest quarter were for capacity expansion rather than replacing old technologies.
AMAT reports four sectors: silicon equipment; display equipment; services; and solar cell production equipment. Most of the growth in the quarter was from the silicon division, but display (panels for TVs and monitors) showed growth too. Services were not hit as hard by the recession, and so saw slower growth.
Solar has two basic parts: equipment for making crystaline cells and equipment for making amorphous, or thin-film, solar panels. The amorphous division is newer and looked promissing two years ago. The crystaline division is profitable and growing, but the thin-film division is in trouble. It is lumpier to begin with. It produced huge sheets of solar cells that are designed to be used by electical utility companies. The factories that make the thin films are capital intensive. One order for a plant was cancelled for lack of financing, while the owners of an existing plant went backrupt. As a result Applied took a $83 million inventory charge. Some investors are demanding that Applied kill this division. I think demand for low-cost solar power will ramp, and improvements in thin-film technology will make this a prized technology in a few years, unless the price of oil drops substantially. But only Applied management has the details available to it to make a good decision for stockholders. Of which I am one, by the way.
It is important to keep in mind that most of Applied's revenue and profits come from equipment for making semiconductor chips, and this segment looks to be in a strong growth cycle that should last through at least 2012. There is pent up demand. Many fabless companies like NVIDIA and Marvell are wishing more capacity were available. Demand is highly likely to ramp even more in calendar Q3 and Q4 this year. So AMAT is going to be making and shipping equipment as fast as they can until they catch up with the demand backlog.
Applied Materials has a lot of cash ($3.6 billion) a huge order backlog ($2.99 billion) and pays a dividend. While it is not without its risks, I consider it a safe, solid performer, but not a get-rich-quick stock. Right now, like many stocks, it is pretty obviously undervalued compared to investments like bonds and CDs. It closed Friday at $12.72 per share. Using Q2 GAAP earnings, that equates to a PE ratio of 15.9. Using non-GAAP EPS of $0.22, that makes the PE 14.5 per share. Which is to say earnings are around 6.7%, while dividends work out to 1.9% per year.
See also Applied Materials and its Fiscal Q2 2010 press release.
For my analyst conference summaries from earlier quarters, see Applied Materials analyst conference summaries.
Overall revenues were up 24% from fiscal Q1 and 125% from Q2 2009. Year earlier was a bad quarter for Applied. As a capital equipment manufacturer (for the semiconductor industry) new orders nearly dried up, and it lost $0.19 per share. But Q2 2010 showed GAAP EPS of $0.20. That sounds like a growth company that should have a high PE multiplier. Partly there were probably some market share gains, but mainly the quick, recent growth is a result of the macro economic cycle.
There is also a technology cycle, where electronic device makers want to squeeze more intelligence into smaller areas of silicon. In 2009 almost all orders were driven by the need for technology upgrades. Now fabs (as semiconductor factories are known) are needing to expand capacity as well. About 60% of sales in the latest quarter were for capacity expansion rather than replacing old technologies.
AMAT reports four sectors: silicon equipment; display equipment; services; and solar cell production equipment. Most of the growth in the quarter was from the silicon division, but display (panels for TVs and monitors) showed growth too. Services were not hit as hard by the recession, and so saw slower growth.
Solar has two basic parts: equipment for making crystaline cells and equipment for making amorphous, or thin-film, solar panels. The amorphous division is newer and looked promissing two years ago. The crystaline division is profitable and growing, but the thin-film division is in trouble. It is lumpier to begin with. It produced huge sheets of solar cells that are designed to be used by electical utility companies. The factories that make the thin films are capital intensive. One order for a plant was cancelled for lack of financing, while the owners of an existing plant went backrupt. As a result Applied took a $83 million inventory charge. Some investors are demanding that Applied kill this division. I think demand for low-cost solar power will ramp, and improvements in thin-film technology will make this a prized technology in a few years, unless the price of oil drops substantially. But only Applied management has the details available to it to make a good decision for stockholders. Of which I am one, by the way.
It is important to keep in mind that most of Applied's revenue and profits come from equipment for making semiconductor chips, and this segment looks to be in a strong growth cycle that should last through at least 2012. There is pent up demand. Many fabless companies like NVIDIA and Marvell are wishing more capacity were available. Demand is highly likely to ramp even more in calendar Q3 and Q4 this year. So AMAT is going to be making and shipping equipment as fast as they can until they catch up with the demand backlog.
Applied Materials has a lot of cash ($3.6 billion) a huge order backlog ($2.99 billion) and pays a dividend. While it is not without its risks, I consider it a safe, solid performer, but not a get-rich-quick stock. Right now, like many stocks, it is pretty obviously undervalued compared to investments like bonds and CDs. It closed Friday at $12.72 per share. Using Q2 GAAP earnings, that equates to a PE ratio of 15.9. Using non-GAAP EPS of $0.22, that makes the PE 14.5 per share. Which is to say earnings are around 6.7%, while dividends work out to 1.9% per year.
See also Applied Materials and its Fiscal Q2 2010 press release.
For my analyst conference summaries from earlier quarters, see Applied Materials analyst conference summaries.
Wednesday, March 31, 2010
Applied Materials (AMAT) Predicts Boom
Applied Materials makes the high technology capital equipment that fabricators use to make semiconductor chips, flat-pannel displays, and solar cells. In early 2009 this business was in stall mode. Revenues dropped to $1 billion for the quarter ending April 26, 2009 (AMAT's 2nd fiscal quarter).
In the first calendar quarter electronics sales were down, and chip manufacturers (fabs) thought had too much capacity. The only reason to buy equipment from Applied Materials was to stay on the upgrade path to new technologies, in particular smaller feature sizes.
Lately all the talk in the computer and electronics industry is about supply constraints. The fabs don't have enough capacity for the newest technologies that are in demand. Just for instance, neither AMD nor NVIDIA has been able to get the new high-end graphics chips in quantities desired.
So fabricators in Taiwan and elsewhere are trying to catch up to the curve. So much so that by the time Applied reported its latest earnings (on February 17 for the quarter ending January 31) revenues for the quarter were $1.85 billion, and net income was $82.8 million.
Guidance given on February 17 was for fiscal 2010 revenues to be up 50% over fiscal 2009 revenues.
But it gets better. Semiconductor chip manufacturers are ordering even more broadly just in the last few weeks. So yesterday Applied Materials increased its guidance. It expects fiscal 2010 revenues to be up over 60% from fiscal 2009. Leading the charge is the silicon manufacturing equipment division, which is expected to be up 120%. Lagging is the solar division, which is expected to be flat to slightly up.
Predicting the future is a dangerous business, but they it is a business I am in. Silicon is coming in quantity to nations like India, China, and Brazil in never-before seen quantities. Applied Materials is one of the few companies with the capital and expertise to keep pushing the limits on shrinking the size of the components on the chips. After minimal upgrading in 2008 and 2009, now through at least 2012 should be a major upgrade and expansion cycle for fabs.
There are small electronics and software companies that will grow faster over this period, but Applied Materials right now is both a value and a growth stock. It pays a dividend, 1.78% at this moment's stock price of $13.71. You will probably get most of your returns, however, out of stock appreciation.
I am a long-term AMAT investor.
Keep diverified!
See also my fiscal Q1 2010 Applied Materials analyst conference summary
And of course www.appliedmaterials.com
In the first calendar quarter electronics sales were down, and chip manufacturers (fabs) thought had too much capacity. The only reason to buy equipment from Applied Materials was to stay on the upgrade path to new technologies, in particular smaller feature sizes.
Lately all the talk in the computer and electronics industry is about supply constraints. The fabs don't have enough capacity for the newest technologies that are in demand. Just for instance, neither AMD nor NVIDIA has been able to get the new high-end graphics chips in quantities desired.
So fabricators in Taiwan and elsewhere are trying to catch up to the curve. So much so that by the time Applied reported its latest earnings (on February 17 for the quarter ending January 31) revenues for the quarter were $1.85 billion, and net income was $82.8 million.
Guidance given on February 17 was for fiscal 2010 revenues to be up 50% over fiscal 2009 revenues.
But it gets better. Semiconductor chip manufacturers are ordering even more broadly just in the last few weeks. So yesterday Applied Materials increased its guidance. It expects fiscal 2010 revenues to be up over 60% from fiscal 2009. Leading the charge is the silicon manufacturing equipment division, which is expected to be up 120%. Lagging is the solar division, which is expected to be flat to slightly up.
Predicting the future is a dangerous business, but they it is a business I am in. Silicon is coming in quantity to nations like India, China, and Brazil in never-before seen quantities. Applied Materials is one of the few companies with the capital and expertise to keep pushing the limits on shrinking the size of the components on the chips. After minimal upgrading in 2008 and 2009, now through at least 2012 should be a major upgrade and expansion cycle for fabs.
There are small electronics and software companies that will grow faster over this period, but Applied Materials right now is both a value and a growth stock. It pays a dividend, 1.78% at this moment's stock price of $13.71. You will probably get most of your returns, however, out of stock appreciation.
I am a long-term AMAT investor.
Keep diverified!
See also my fiscal Q1 2010 Applied Materials analyst conference summary
And of course www.appliedmaterials.com
Thursday, February 18, 2010
Applied Materials and NVIDIA correlation
Yesterday I listened to the quarterly analyst conferences for graphic chip maker NVIDIA (NVDA) and semiconductor equipment manufacturer Applied Materials (AMAT). You can see my summaries at:
Applied Materials (AMAT) Q1 Fiscal 2010 analyst conference summary
NVIDIA (NVDA) Q4 Fiscal 2010 analyst conference summary
One data point that matched up was that there is a shortage of key production capacity for semiconductor manufacturing. Nvidia described this as a supply constraint. This is called process technology, and it comes in generations, with less nanometers (nm) being better. 40nm is where Nvidia is at for process technology its newest chips.
The result was a great quarter for semiconductor equipment makers including Applied, which had revenues of $1.85 billion, up 21% sequentially, and up 39% from the year-earlier quarter.
The question for Applied is, how long can this last. Executives were cautious with their guidance, saying it is hard to predict the second half of 2010 at this point. The jump in the quarter that ended January 31 has a lot to do with manufacturers needing to make up for pent up demand. Remember the gloom and doom of January 2009? No one was buying manufacturing equipment; there was plenty of capacity. But designers like Nvidia expect a new generation of smaller chips about every 2 years. So their new products can't even be done on the older processes, which have plenty of capacity.
So two scenarios are possible. One is that with some extra equipment bought in the second half of 2009 and first half of 2010, manufacturers will be up to date on the newer technology. This assumes that the global economy, and in particular the consumer electronics segment of the U.S. economy, grows slowly in 2010.
I think the other scenario is more likely. Demand in nations like India, China, Indonesia, and Brazil will grow rapidly, and the U.S. will ramp moderately, rather than slowly. People are going to want the new smartphones, especially ones that use Marvell's chips to get prices under $125 in Asia. At the same time mobile pushes the small end of web presence, technologies like Nvidia's 3D Vision and AMD's Eyefinity will reinvigorate the large screen segment. Applied Materials makes equipment to manufacture large screen displays, so they should benefit.
All bets on technology involve risks. So ...
Keep diversified!
Applied Materials (AMAT) Q1 Fiscal 2010 analyst conference summary
NVIDIA (NVDA) Q4 Fiscal 2010 analyst conference summary
One data point that matched up was that there is a shortage of key production capacity for semiconductor manufacturing. Nvidia described this as a supply constraint. This is called process technology, and it comes in generations, with less nanometers (nm) being better. 40nm is where Nvidia is at for process technology its newest chips.
The result was a great quarter for semiconductor equipment makers including Applied, which had revenues of $1.85 billion, up 21% sequentially, and up 39% from the year-earlier quarter.
The question for Applied is, how long can this last. Executives were cautious with their guidance, saying it is hard to predict the second half of 2010 at this point. The jump in the quarter that ended January 31 has a lot to do with manufacturers needing to make up for pent up demand. Remember the gloom and doom of January 2009? No one was buying manufacturing equipment; there was plenty of capacity. But designers like Nvidia expect a new generation of smaller chips about every 2 years. So their new products can't even be done on the older processes, which have plenty of capacity.
So two scenarios are possible. One is that with some extra equipment bought in the second half of 2009 and first half of 2010, manufacturers will be up to date on the newer technology. This assumes that the global economy, and in particular the consumer electronics segment of the U.S. economy, grows slowly in 2010.
I think the other scenario is more likely. Demand in nations like India, China, Indonesia, and Brazil will grow rapidly, and the U.S. will ramp moderately, rather than slowly. People are going to want the new smartphones, especially ones that use Marvell's chips to get prices under $125 in Asia. At the same time mobile pushes the small end of web presence, technologies like Nvidia's 3D Vision and AMD's Eyefinity will reinvigorate the large screen segment. Applied Materials makes equipment to manufacture large screen displays, so they should benefit.
All bets on technology involve risks. So ...
Keep diversified!
Thursday, November 12, 2009
Shortages for Electronics, Semiconductor and Computer Makers
Listening to a variety analyst conferences this last couple of weeks I heard a variety of executives mention shortages of the components they needed to manufacture their own products. Some simply had to scurry to get parts, others lost sales because they were unable to deliver product.
Extreme Networks, EXTR, for instance, was unable to manufacture its latest and greatest network switching devices in sufficient quantity. They had let their inventories get too low.
Integrated Silicon Solutions, ISSI, reported that there was a shortage of wafers (the starting point for making their memory devices), but that they actually sold more than expected because their rivals in the SRAM and specialty DRAM market were not able to make deliveries.
NVIDIA, NVDA, had the most serious problem I heard. They make graphics processors for computers and mobile devices. NVIDIA's third quarter revenues grew 16% sequentially, but they believe they could have shipped $50 million to $100 million more in product if they had product to ship. The problem was mainly in the newest, high-end graphics chips. TSMC, the foundry that makes them for NVIDIA [and makes much of the world's semiconductors], could not make the chips fast enough. Partly this was due to low process yields on the latest, most miniaturized technology.
AMD's graphics processor segment probably picked up some of the slack, but they are also using TSMC and can't get enough of their newest product either. However, they apparently did a better job anticipating demand than NVIDIA did.
Dot Hill, HILL, was able to get enough disks to ship their storage units to HP, NetApp, and other customers, but reported that they had to work hard to get enough disks and could not guarantee they could get as many disks as they will need in the fourth quarter if demand continues to ramp.
There are probably many more examples, and of course there are always companies products aren't competitive and so are not worried about shortages. But the general pattern is clear. From bottom to top, inventories were taken too low earlier this year, and manufacturing capacity was cut back too much.
Much of the increase in end-user demand is coming from China, but there is a buildup in demand in the United States off the lows of late 2008 to early 2009.
I am expecting robust growth in most segments of the global semiconductor, networking, and computer equipment industry during 2010.
Even capital equipment makers like Applied Materials, AMAT, are looking at a return of demand. It might seem that since on the whole demand is still lower than in 2008, foundries would not need to be buying new semiconductor manufacturing equipment yet. But just as new, better, higher capacity products are always being designed, the machinery for making them has to be upgraded. If someone wants 33nm parts, you can't make them with 90 nm tools. So it now makes sense to buy newer, higher-technology equipment rather than simply restarting production lines that make parts that are no longer in demand.
Disclaimer: I own shares of AMD, HILL, and AMAT. I do not own shares of the other companies mentioned (as of today). - William P. Meyers
Extreme Networks, EXTR, for instance, was unable to manufacture its latest and greatest network switching devices in sufficient quantity. They had let their inventories get too low.
Integrated Silicon Solutions, ISSI, reported that there was a shortage of wafers (the starting point for making their memory devices), but that they actually sold more than expected because their rivals in the SRAM and specialty DRAM market were not able to make deliveries.
NVIDIA, NVDA, had the most serious problem I heard. They make graphics processors for computers and mobile devices. NVIDIA's third quarter revenues grew 16% sequentially, but they believe they could have shipped $50 million to $100 million more in product if they had product to ship. The problem was mainly in the newest, high-end graphics chips. TSMC, the foundry that makes them for NVIDIA [and makes much of the world's semiconductors], could not make the chips fast enough. Partly this was due to low process yields on the latest, most miniaturized technology.
AMD's graphics processor segment probably picked up some of the slack, but they are also using TSMC and can't get enough of their newest product either. However, they apparently did a better job anticipating demand than NVIDIA did.
Dot Hill, HILL, was able to get enough disks to ship their storage units to HP, NetApp, and other customers, but reported that they had to work hard to get enough disks and could not guarantee they could get as many disks as they will need in the fourth quarter if demand continues to ramp.
There are probably many more examples, and of course there are always companies products aren't competitive and so are not worried about shortages. But the general pattern is clear. From bottom to top, inventories were taken too low earlier this year, and manufacturing capacity was cut back too much.
Much of the increase in end-user demand is coming from China, but there is a buildup in demand in the United States off the lows of late 2008 to early 2009.
I am expecting robust growth in most segments of the global semiconductor, networking, and computer equipment industry during 2010.
Even capital equipment makers like Applied Materials, AMAT, are looking at a return of demand. It might seem that since on the whole demand is still lower than in 2008, foundries would not need to be buying new semiconductor manufacturing equipment yet. But just as new, better, higher capacity products are always being designed, the machinery for making them has to be upgraded. If someone wants 33nm parts, you can't make them with 90 nm tools. So it now makes sense to buy newer, higher-technology equipment rather than simply restarting production lines that make parts that are no longer in demand.
Disclaimer: I own shares of AMD, HILL, and AMAT. I do not own shares of the other companies mentioned (as of today). - William P. Meyers
Thursday, September 3, 2009
Applied Materials Under the Hood
Applied Materials makes capital equipment, which is equipment used to manufacturer further equipment or goods. In Applied Materials' case it manufactures the machines used to make semiconductors and related electronic equipment. It has four major segments: semiconductor; display; solar; and services.
Capital equipment can be a bad place to be in a down cycle. With demand slack, manufacturers don't need to expand their capacity. Even after the macroeconomic cycle has hit bottom it may take months or years for capacity to become constrained enough to force businesses to make significant investments in new capital equipment.
Each type of capital equipment, however, has its own quirks. The main quirk to be aware of in the semiconductor industry is that the expansion of capabilities of logic and memory chips is dependent on ever-shriking circuit elements. In the industry the vocabulary is in "process technologies" measured in nanometers (nm). For instance, not that long ago the cutting edge was 90 nm; today it is 45 nm; 33 nm is expected shortly.
So while the 2008-2009 recession left manufacturers with plenty of capacity, much of it is now the wrong capacity. For a specific NAND (Flash) memory chip, for instance, the oldest manufacturing capacity may no longer cost effective because the prices for the chips have dropped so dramatically. To keep up to pace, smaller process technologies must be used.
While semiconductor making equipment sales dropped sharply for AMAT during the recession, they did not drop to zero. Part of this was because orders had been made long in advance. Partly it was because some confident, well-funded manuacturers continued to buy the newest equipment in order to be set to have better profit margins than competitors.
When will the need for new equipment compensate for the decreased overall end demand? It has not happened yet. For Q2, semiconductor segment revenue ramped from Q1 to $498 million, but was down 34% from $756 million in Q2 2008, which itself was a soft quarter. Management said orders picked up significantly in the June.
The most likely scenario is that 2010 will be a good year for Applied Materials. Between the ongoing shift to smaller process technologies and the shift in computer memory to DDR3, a lot of new equipment is going to be required. Whether the ramp up will be strong in the second half of 2009, however, is an open question.
Applied Materials has also invested heavily to develop technologies for manufacturing solar cells. Several solar cell factories are now operating that use Applied equipment. Financing restraints have cut back planned equipment purchases, but this is likely to be a temporary effect. When the global economy revives and oil prices start heading up again, there will be another rush to solar. This time Applied Materials will be ready with perfected manufacturing processes.
In display, which is flat panel displays, demand in the China market is breathing life back into the market. There was plentiful capacity in mid 2008, so most manufacturers paused their equipment purchases. Now, while prices are still low, unit sales globally have ramped to the point that factories are nearing their capacity constraints. So expect new equipment orders, especially in 2010.
Applied Materials did a pretty good job cutting back on expenses during the difficult times. As a result, in Q2 GAAP its GAAP loss was $55 million, but cash flow from operations was $194 million.
Applied Materials is predicting to at least break even on a GAAP basis in Q3.
The usual business risks from competition and shifting demand patterns remain present.
So keep diversified!
Applied Materials main page
Applied Materials Investor Relations page
Openicon Applied Materials main page
Capital equipment can be a bad place to be in a down cycle. With demand slack, manufacturers don't need to expand their capacity. Even after the macroeconomic cycle has hit bottom it may take months or years for capacity to become constrained enough to force businesses to make significant investments in new capital equipment.
Each type of capital equipment, however, has its own quirks. The main quirk to be aware of in the semiconductor industry is that the expansion of capabilities of logic and memory chips is dependent on ever-shriking circuit elements. In the industry the vocabulary is in "process technologies" measured in nanometers (nm). For instance, not that long ago the cutting edge was 90 nm; today it is 45 nm; 33 nm is expected shortly.
So while the 2008-2009 recession left manufacturers with plenty of capacity, much of it is now the wrong capacity. For a specific NAND (Flash) memory chip, for instance, the oldest manufacturing capacity may no longer cost effective because the prices for the chips have dropped so dramatically. To keep up to pace, smaller process technologies must be used.
While semiconductor making equipment sales dropped sharply for AMAT during the recession, they did not drop to zero. Part of this was because orders had been made long in advance. Partly it was because some confident, well-funded manuacturers continued to buy the newest equipment in order to be set to have better profit margins than competitors.
When will the need for new equipment compensate for the decreased overall end demand? It has not happened yet. For Q2, semiconductor segment revenue ramped from Q1 to $498 million, but was down 34% from $756 million in Q2 2008, which itself was a soft quarter. Management said orders picked up significantly in the June.
The most likely scenario is that 2010 will be a good year for Applied Materials. Between the ongoing shift to smaller process technologies and the shift in computer memory to DDR3, a lot of new equipment is going to be required. Whether the ramp up will be strong in the second half of 2009, however, is an open question.
Applied Materials has also invested heavily to develop technologies for manufacturing solar cells. Several solar cell factories are now operating that use Applied equipment. Financing restraints have cut back planned equipment purchases, but this is likely to be a temporary effect. When the global economy revives and oil prices start heading up again, there will be another rush to solar. This time Applied Materials will be ready with perfected manufacturing processes.
In display, which is flat panel displays, demand in the China market is breathing life back into the market. There was plentiful capacity in mid 2008, so most manufacturers paused their equipment purchases. Now, while prices are still low, unit sales globally have ramped to the point that factories are nearing their capacity constraints. So expect new equipment orders, especially in 2010.
Applied Materials did a pretty good job cutting back on expenses during the difficult times. As a result, in Q2 GAAP its GAAP loss was $55 million, but cash flow from operations was $194 million.
Applied Materials is predicting to at least break even on a GAAP basis in Q3.
The usual business risks from competition and shifting demand patterns remain present.
So keep diversified!
Applied Materials main page
Applied Materials Investor Relations page
Openicon Applied Materials main page
Saturday, August 15, 2009
Dot Hill, Applied Materials, Dendreon, Microchip and NVIDIA
Soon I should be writing Dissecting the Bull blogs on a regular basis again. The first half of August was an exciting time for the economy and investors, but my head was buried in a project for Microsoft, which I turned in Friday.
I did post several analyst conference summaries. Probably the most interesting is the summary for Dot Hill, which posted huge percentage gains in the week after the conference.
In this post I am just providing links to my most recent conference summaries:
Applied Materials (AMAT) August 11, 2009 analyst conference summary
Dendreon (DNDN) August 11, 2009 analyst conference summary
Dot Hill (HILL) August 10, 2009 analyst conference summary
Microchip (MCHP) August 6, 2009 analyst conference summary
NVIDIA (NVDA) August 6, 2009 analyst conference summary
I did post several analyst conference summaries. Probably the most interesting is the summary for Dot Hill, which posted huge percentage gains in the week after the conference.
In this post I am just providing links to my most recent conference summaries:
Applied Materials (AMAT) August 11, 2009 analyst conference summary
Dendreon (DNDN) August 11, 2009 analyst conference summary
Dot Hill (HILL) August 10, 2009 analyst conference summary
Microchip (MCHP) August 6, 2009 analyst conference summary
NVIDIA (NVDA) August 6, 2009 analyst conference summary
Wednesday, May 13, 2009
Applied Materials Segment Performance Varies
Applied Materials (AMAT) is on the ropes. Fortunately it has large cash reserves. It is still paying a dividend (about 2% at this stock price). And it should bounce back when (or if) the global economy starts to recover.
The main take away for me from the AMAT analyst conference on May 12, 2009 was that there is a great deal of variance between the four major segments that make up the company. Let's take a look.
Traditionally Applied Materials makes the machines that make semiconductor chips. Broadly, the chips can be further divided into memory chips and logic IC's, although of course many systems now integrate both on a single chip. AMAT calls this it Silicon Segment. It had $260 million in revenue in the quarter. A year ago, the Silicon Segment had $1.27 billion in orders.
There is the cyclical problem with being a capital equipment manufacturer for you in a nutshell. Demand for end products like cell phones and computers is down. So demand for the chips that make them work is down. The chip manufacturing companies have plenty of capacity right now. Even as demand ramps up (if it does), they can go a bit before adding new capacity.
What silicon semiconductor equipment that was sold did not really go to increase unit capacity. A few companies are continuing to forge ahead on their technology roadmaps during the downturn. This means, in this industry, smaller process technologies. Applied Materials is selling the next generation of machines that can produce chips with smaller gates.
New orders in the Silicon Segment were $259 million. You can't tell exactly what the next quarter's revenues will be from new orders. The lag for this type of equipment is typically more than a quarter. Applied Materials had a backlog of $3.16 billion in orders at the end of the quarter (including all segments), so it could run for some time just filling older orders.
The global services segment is more steady. It had $319 million in revenue and $236 million in new orders, compared to $599 million in revenues year-earlier. That is still quite a drop off. Equipment needs to be maintained, but with utilization low the need for services drops off too.
The best news was in the environmental technology segment, which I prefer to refer to as Solar. Again, AMAT does not make solar cells, it makes the equipment to make solar cells. These are of two major types, crystalline silicon and thin-film. A year ago this quarter, revenues in solar were only $85 million. This quarter the revenue came in at $357 million, though new orders were only $141 million. Demand was very high a year ago - you remember the energy price bubble? - and now while there is plenty of long-term demand, new factories of any kind are considered a risky business.
The fourth segment is Display, which you can think of as equipment to make flat LCD screens for TVs. Results here were dismal: $84 million in sales and $13 million in new orders. Year-earlier revenues were $198 million. Again, a lot of capacity was built in 2007 and 2008, then demand slumped in the fall of 2008. Applied Materials management believes that flat-screen tvs continue to win market share, so some time in late 2009 manufacturers will have to start increasing capacity again for the presumed sunnier days of 2010.
The silicon segment is expected to recover gradually as demand re-ramps and older process technologies are scrapped for newer ones. Solar will ramp again as soon as energy prices go back up and financing becomes more generally available. Services will ramp as utilization of current equipment increases.
Of course, all of these trends assume that the economy will improve in the second half of 2009 and show something like sustained growth in 2010. In the meantime, if you own some AMAT stock (I do), sit back and enjoy your dividends. Applied Materials has $3.1 billion in cash and equivalents in the bank, and even in this dismal quarter was better than break even on cash flow (but non-GAAP net loss was $136 million, and GAAP net loss was $255 million). Some day demand for semiconductor equipment will return, and with its new solar business on top of that, Applied Materials will be even more impressive than it was back in 2007.
The main take away for me from the AMAT analyst conference on May 12, 2009 was that there is a great deal of variance between the four major segments that make up the company. Let's take a look.
Traditionally Applied Materials makes the machines that make semiconductor chips. Broadly, the chips can be further divided into memory chips and logic IC's, although of course many systems now integrate both on a single chip. AMAT calls this it Silicon Segment. It had $260 million in revenue in the quarter. A year ago, the Silicon Segment had $1.27 billion in orders.
There is the cyclical problem with being a capital equipment manufacturer for you in a nutshell. Demand for end products like cell phones and computers is down. So demand for the chips that make them work is down. The chip manufacturing companies have plenty of capacity right now. Even as demand ramps up (if it does), they can go a bit before adding new capacity.
What silicon semiconductor equipment that was sold did not really go to increase unit capacity. A few companies are continuing to forge ahead on their technology roadmaps during the downturn. This means, in this industry, smaller process technologies. Applied Materials is selling the next generation of machines that can produce chips with smaller gates.
New orders in the Silicon Segment were $259 million. You can't tell exactly what the next quarter's revenues will be from new orders. The lag for this type of equipment is typically more than a quarter. Applied Materials had a backlog of $3.16 billion in orders at the end of the quarter (including all segments), so it could run for some time just filling older orders.
The global services segment is more steady. It had $319 million in revenue and $236 million in new orders, compared to $599 million in revenues year-earlier. That is still quite a drop off. Equipment needs to be maintained, but with utilization low the need for services drops off too.
The best news was in the environmental technology segment, which I prefer to refer to as Solar. Again, AMAT does not make solar cells, it makes the equipment to make solar cells. These are of two major types, crystalline silicon and thin-film. A year ago this quarter, revenues in solar were only $85 million. This quarter the revenue came in at $357 million, though new orders were only $141 million. Demand was very high a year ago - you remember the energy price bubble? - and now while there is plenty of long-term demand, new factories of any kind are considered a risky business.
The fourth segment is Display, which you can think of as equipment to make flat LCD screens for TVs. Results here were dismal: $84 million in sales and $13 million in new orders. Year-earlier revenues were $198 million. Again, a lot of capacity was built in 2007 and 2008, then demand slumped in the fall of 2008. Applied Materials management believes that flat-screen tvs continue to win market share, so some time in late 2009 manufacturers will have to start increasing capacity again for the presumed sunnier days of 2010.
The silicon segment is expected to recover gradually as demand re-ramps and older process technologies are scrapped for newer ones. Solar will ramp again as soon as energy prices go back up and financing becomes more generally available. Services will ramp as utilization of current equipment increases.
Of course, all of these trends assume that the economy will improve in the second half of 2009 and show something like sustained growth in 2010. In the meantime, if you own some AMAT stock (I do), sit back and enjoy your dividends. Applied Materials has $3.1 billion in cash and equivalents in the bank, and even in this dismal quarter was better than break even on cash flow (but non-GAAP net loss was $136 million, and GAAP net loss was $255 million). Some day demand for semiconductor equipment will return, and with its new solar business on top of that, Applied Materials will be even more impressive than it was back in 2007.
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