Applied Materials (AMAT) Stock Analysis

5. AMAT’s Enterprise

Overview

AMAT is working within the higher a part of the semiconductor worth chain. It gives the semiconductor trade with the equipment it wants to provide chips. The corporate employs 31,900 folks and generates a complete of $25B in annual income. AMAT manages most of its gross sales immediately, not counting on distributors.

The corporate focuses on gear for the semiconductor trade, but additionally for just a few different sectors. This consists of Show (screens), Photo voltaic, Roll-to-Roll coating (digital printing on versatile movie), and Automation software program/Good Manufacturing facility.

Virtually 3/4 of revenues come from the semiconductors phase. AMAT skilled explosive progress within the 2020-2021 interval, earlier than coming again to the earlier progress pattern:

Many of the gross sales (86%) are to prospects in Asia, notably China (33%), Korea (22%), Taiwan (20%), Japan (8%), and South-East Asia (3%).

AMAT’s headquarters is in Santa Clara, California. Its semiconductor-related merchandise are manufactured in California, Texas, Montana, Israel, and Singapore.

So whereas the corporate’s shoppers is likely to be in Taiwan, China, or Korea its manufacturing services are in a lot safer areas. This makes AMAT a uncommon haven of security relating to geopolitical threat within the semiconductor trade.

If something occurred to AMAT’s shoppers in East Asia (like a China-Taiwan warfare), the lack of income can be offset by a large and panicked build-up of capability in different areas.

AMAT’s Moats

Apart from its security from a geopolitical viewpoint, AMAT is a high-quality firm.

It’s a main provider within the trade and sells on to essentially the most outstanding corporations within the sector. 20% of its enterprise is finished with Samsung, 15% with TSMC, and a bit under 10% with Intel.

The trade is inherently “moaty”, nearly as good merchandise result in a dominance of the market, resulting in extra income, giving more cash to maintain innovating, and resulting in extra dominance. The identical dynamic that has led TSMC to regulate half of the trade income is at play with AMAT.

The trade calls for extraordinarily excessive ranges of capital and experience, making it tough for rivals to enter.

On high of this “normal” moat, you may add the substitution value. Any rivals must show an excellent superiority to an present consumer of AMAT’s instruments. Something lower than that might make the dangers of substitution too excessive.

The one threat for AMAT’s market place can be a technological shift away from its present and future choices.

If we’re to imagine the corporate’s administration, this isn’t a menace however a possibility. The corporate appears to be the chief within the yet-to-be-implemented subsequent technological progress.

The main know-how roadmap inflections—together with Gate All Round transistors, Bottom Energy Distribution Networks, new supplies for interconnect and phone, and Heterogeneous Integration of chips and chiplets—are enabled by supplies engineering the place Utilized Supplies is the chief, and this shifts extra {dollars} to our obtainable market over time.

Gary Dickerson, AMAT CEO

As I mentioned, I’m not a semiconductor engineer, so I’m truthfully not certified to guage if AMAT is actually the chief in “Bottom Energy Distribution Networks” or “Heterogenous Integration”. However contemplating Samsung, TSMC and Intel are at present trusting AMAT to ship excessive efficiency, I feel we will anticipate them to remain the identical within the subsequent 3-5 years a minimum of.

AMAT’s Operations

The corporate is providing instruments and software program for nearly each step of the chip manufacturing course of. It’s spending a big $2.5B/yr in R&D, up from $2.2B in 2020 and $2B in 2019.

As AMAT merchandise embody all the actions of a foundry, they will additionally supply built-in options. Every of its equipment traces will be built-in with one another, utilizing AMAT’s software program. That creates an incentive for patrons so as to add extra AMAT merchandise.

This stage of synergy makes the substitution prices an particularly robust moat. Changing an AMAT instrument or software program can imply redesigning a complete a part of the foundry operation, retraining technicians, ironing out bugs, needing additional checks to detect faults within the chips produced, and so on.

Advertising and marketing & gross sales operations are remarkably lean, with a complete value of solely $0.6B in 2021, in comparison with the $23B in gross sales. Or a gross sales cost-to-revenues ratio of simply 2.6%. It appears to me that at this level, gross sales are extra primarily based on established relationships, fame, and innovation moderately than on the sale course of itself. As a result of the trade is dominated by a comparatively small variety of established producers, present relationships matter greater than growing new prospects.

Equally, overhead is simply $0.6B. Which means that the corporate may scale up gross sales as much as its most manufacturing capability with out a lot improve in gross sales or administrative prices.

Total, AMAT operation appears very environment friendly, with a really lean gross sales and administrative facet, and many of the cash going to innovation and sustaining excessive margins (extra on that within the valuation chapter).

AMAT Investments

Counting on its experience with silicon and manufacturing on the nanometer scale, AMAT can be investing in promising corporations. The corporate invests round $100M per yr in startups by means of its Enterprise Funding Department.

AMAT has at present invested in a enterprise portfolio of 90 completely different corporations. A whole evaluation of this portfolio would flip right into a report in itself, so I should preserve it quick.

What I discover fascinating is the presence of next-generation computing know-how, like printed electronics, silicon photonics, and optical communication (through lasers). It’s also touching new fields, like 3D printing/additive manufacturing, lithium-ion batteries, and electrical motors.

It’d appear to be a really numerous portfolio, however each single one in all these ventures depends on exact, atomic-level re-arranging of matter. That very same discipline has been the middle of AMAT’s experience because the Nineteen Sixties. So whereas functions would possibly diverge, that is truly proper on the core competency of the corporate. AMAT is uniquely certified to judge startups in these industries.

Fairly just a few of those startups have been acquired, providing AMAT profitable exits.

Whereas that is absolutely worthwhile, I feel it could possibly be fascinating for shareholders to possibly see the corporate going all in for a minimum of one new software, including a brand new phase to the present photo voltaic+show+semiconductors. 3D printing gear has essentially the most potential in my view.

AMAT can be partnering with a number of universities, analysis institutes, and corporations. These partnerships appear to work along with enterprise funding in fields like battery know-how, 3D printing, and medical therapies utilizing nanotechnology.

AMAT Outlook

AMAT’s moat from a provide chain and know-how viewpoint appears safe. So how is the enterprise outlook?

Whereas I assume new foundries constructed up everywhere in the world ought to be excellent news, I most well-liked to test it up. I discussed AMAT revenues jumped in 2021, and so did its backlog:

Regardless of the commonly cooling international economic system, the backlog has solely grown. At this level, it’s past 12 months, with AMAT shoppers offering longer than regular visibility about future demand. And that was earlier than the USA determined to offer an extra $50B in subsidies for brand new foundries.

We anticipate Utilized to stay provide constrained for the following a number of quarters, we’re working by means of our very substantial backlog of orders which gives a buffer to in-year demand fluctuations and, as well as, prospects are offering us with longer-term visibility and commitments in response to their very own prospects’ actions to lock within the strategic capability they want.

Gary Dickerson, AMAT CEO

The Twelve-Trailing-Months (TTM) revenues additionally appear to point that demand is just not slowing down. The one sector slowing down is Show, which is sensible as individuals are shopping for fewer TVs and computer systems.

I feel the necessity to enhance the effectivity of present foundries was a giant purpose for the bounce in gross sales in 2021, together with AMAT’s shoppers being flush with money and overwhelmed by demand.

As a result of customers of chips are additionally more likely to begin constructing a a lot bigger stock, I feel chip demand goes to remain considerably elevated for some time, a minimum of outdoors of the buyer digital markets. This could give AMAT’s shopper the money and confidence wanted to go ahead with the plans for brand new foundries.

So going ahead, the demand shall be pushed by the necessity to preserve present foundries operating, together with constructing new ones.