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I would not totally rule out the possibilities of quality/reliability issue and "outdated" inventory - as we are at multiple inflections (technology) stage ; and as feature size or process technology node gets smaller, unprecedented precision engineering will be needed.
2013: Facing unprecedented precision engineering challenges
01/02/2013
By Randhir Thakur, Vice President and General Manager, Silicon Systems Group, Applied Materials
Mobility is the biggest influence shaping the semiconductor industry and is the main driver of chip development. Smartphone sales are expected to surpass 700 million units growing at a 50% growth rate year over year and demand for tablets is set to exceed 110 million units growing at an 85% rate year over year. The race to manufacture chips for the surging mobile markets is driving the industry to explore new materials and technologies to enable essential breakthroughs for higher, more power-efficient performance. For the PC market, we will see the advent of Ultrabooks and the new Windows 8 operating system – both of which can spur a technology upgrade cycle and drive growth.
Multiple inflections will figure prominently in 2013. Among these, we see the Foundry transition to 20-nanometer process technology node as a significant milestone. 20-nanometer is all about building advanced transistors that can deliver low leakage, low power and high performance in a smaller footprint. To achieve this combination of performance and energy efficiency, chip makers must adopt high k metal gate transistors which could deliver a 20 percent savings in power consumption while offering a 15% increase in speed. Further leakage and speed performance improvements at 20nm and below will be gained from FinFET transistors. Beyond advances to the transistor, we expect major inflections in lower resistance interconnects, advanced patterning, packaging, and 3D NAND flash technology.
We’ve never seen in this level of change in the industry or this pace of manufacturing process development. Innovations in new semiconductor materials, manufacturing processes and other technologies will be needed to support these inflections that each pose critical challenges. Unprecedented precision engineering will be needed to manufacture chips features measured in nanometers. At these dimensions every atom counts and controlling variability is vital to meet performance and productivity targets. Also pivotal in enabling future chips will be new classes of materials with superior properties that can be used in a broad range of process applications.
With demand for new forms of consumer electronics and new methods of computing driving the pace of innovations, we’re going to see more changes in the next five years than we’ve seen in last 15. These innovations will require major research and development efforts and very early and close collaboration across the industry.
http://www.electroiq.com/articles/sst/20...enges.html
Interesting article but I do not agree with the author that the semiconductor capital equipment is a fairly stable industry - it is cyclical.
I do agree that the industry is becoming oligopolistic with a few big players but please note that ASML and Tokyo Electrion and Nikon are dominating in the lithographic equipment segment whereas Applied Materials, KLAC (KLAC), Lam Research (LAM), are dominating the remaining segments of the semiconductor equipment market with AM being the leader.
Fewer players means more pricing power potentially for Applied Materials. - Not a good time and gesture to have margin squeeze on its strategic partner - if it is the case - haha !
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Applied Materials: Oligopoly Play At Cyclical Trough
Applied Materials (AMAT) is the world's largest semiconductor capital equipment company both in terms of value and sales. Semiconductor fabs are multibillion dollar factories where silicon chips that go into tablets and smartphones are made. These fabs house very specialized and complex equipment which are made by a handful of suppliers. Most of these companies are Japanese and US (ASML is an exception). Unlike other industries, the semiconductor capital equipment is a fairly stable industry with a massive moat. The Korean and Chinese companies have never managed to make inroads into the semiconductor capital equipment industry due to the high IP barriers. The growth in this industry has not been great, but it is safe from the competitive pressures unlike other sectors such as smartphones, tablets or PCs. KLAC (KLAC), Lam Research (LAM), AMAT and Tokyo Electron are the biggest players in the sector. They have a comfortable oligopoly with high margins. The industry has also been consolidating around the main players with Applied Materials buying Varian Semiconductor and Lam buying Novellus Systems.
We are positively biased towards Applied Materials because of its leading position in the "semicap" sector. The expenditure on the semi equipment is set to grow with the industry transitioning to smaller design nodes and shifting towards 450 mm wafers from 300 mm. Intel is already building out the first 10x nm node and plans to spend $2 billion on 450 mm wafers. Other companies such as Samsung and TSMC (TSM) will have to match Intel or get left behind. Intel (INTC) has already bought a big stake in one of the major semicap players ASML Holdings (ASML) to accelerate the technology advancement process.
Why we like AMAT
Technology Advantage - Applied Materials has a tremendous technology advantage in a number of areas such as implant, PVD, CVD, etc. While the company competes with KLAC and LAM in a number of these fields, we do not think the company is in any big danger of losing significant market share. The company is perfectly capable of making equipment for smaller design nodes which would require increasing complexity. The company spends almost 15-20% of its revenues on R&D every year to keep its technological lead.
Cyclical Trough - We think that Applied Materials is at the cyclical trough and its prospects should improve with increase in semi equipment spending. Management believes that the worst of the trough has passed and I believe them. The company's solar equipment revenues have fallen off a cliff (down 80%) and the only way to go is up. Display revenues should also go up in the 2nd half of 2013 as the industry recovers.
Industry Consolidation - Competitive dynamics in the semiconductor industry are improving with the Tier 2 players like Varian and Novellus being gobbled up by the Tier 1 players. This will help the top 5 companies to maintain prices and improve margins. We do not see any new entrant coming into the semicap market anytime soon because of the high industry barriers.
Decent Dividends - Applied Materials has kept on increasing dividends as the industry has matured. While the recent stock rally has decreased the yield from ~3% to 2.65% now, it is still a decent yield for a technology company. AMAT also operates in a less competitive space than other companies so it makes their yield much safer. Dividends have grown by 500% from 6 cents in 2005 to 34 cents in 2012.
Strong free cash flows - Applied Materials manages to earn an average of ~$1.5 billion in free cash flows every year as the capex requirements of the business are quite low. Though earnings in the last year were affected due to big restructuring charges, FCF was still quite strong.
Applied Material Risks
Solar Market Problems - The whole solar energy market has been hurt hard by the overcapacity in solar panels. Applied Materials has become the No.1 supplier of equipment to solar companies, through acquisitions. However, all has not been rosy for AMAT, which was forced to abandon its amorphous silicon thin film equipment line in 2009. The company has also sharply reduced spending on crystalline solar panel equipment after the whole market crashed. Pure play solar equipment companies like GTAT and Meyer Burgher are trying to survive this tough period.
Declining PC market - The PC market is showing declining revenues and volumes, as tablets cannibalize the laptop market. However, the growth of smartphones and tablets has managed to offset some of that growth decline. AMAT has been hurt from a decline in the memory segment revenues apart from slowing of the logic revenues.
Slow growth - Applied Material's revenue in 2012 was only 10% up from its 2004 level, despite the company having made major inroads into the Display and Solar equipment markets. However, the thing to remember is that the company plays in a cyclical industry which is going through a trough right now. Its revenues in 2011 were $10.5 billion. The company expects WFE equipment spending to range between -10% - 0% growth in 2013. Given Intel's capex announcement, I think that it will be on the higher end. However, there are global economic slowdown risks which also have to be taken into account.
http://seekingalpha.com/article/1204661-...e_readmore
2013: Facing unprecedented precision engineering challenges
01/02/2013
By Randhir Thakur, Vice President and General Manager, Silicon Systems Group, Applied Materials
Mobility is the biggest influence shaping the semiconductor industry and is the main driver of chip development. Smartphone sales are expected to surpass 700 million units growing at a 50% growth rate year over year and demand for tablets is set to exceed 110 million units growing at an 85% rate year over year. The race to manufacture chips for the surging mobile markets is driving the industry to explore new materials and technologies to enable essential breakthroughs for higher, more power-efficient performance. For the PC market, we will see the advent of Ultrabooks and the new Windows 8 operating system – both of which can spur a technology upgrade cycle and drive growth.
Multiple inflections will figure prominently in 2013. Among these, we see the Foundry transition to 20-nanometer process technology node as a significant milestone. 20-nanometer is all about building advanced transistors that can deliver low leakage, low power and high performance in a smaller footprint. To achieve this combination of performance and energy efficiency, chip makers must adopt high k metal gate transistors which could deliver a 20 percent savings in power consumption while offering a 15% increase in speed. Further leakage and speed performance improvements at 20nm and below will be gained from FinFET transistors. Beyond advances to the transistor, we expect major inflections in lower resistance interconnects, advanced patterning, packaging, and 3D NAND flash technology.
We’ve never seen in this level of change in the industry or this pace of manufacturing process development. Innovations in new semiconductor materials, manufacturing processes and other technologies will be needed to support these inflections that each pose critical challenges. Unprecedented precision engineering will be needed to manufacture chips features measured in nanometers. At these dimensions every atom counts and controlling variability is vital to meet performance and productivity targets. Also pivotal in enabling future chips will be new classes of materials with superior properties that can be used in a broad range of process applications.
With demand for new forms of consumer electronics and new methods of computing driving the pace of innovations, we’re going to see more changes in the next five years than we’ve seen in last 15. These innovations will require major research and development efforts and very early and close collaboration across the industry.
http://www.electroiq.com/articles/sst/20...enges.html
Interesting article but I do not agree with the author that the semiconductor capital equipment is a fairly stable industry - it is cyclical.
I do agree that the industry is becoming oligopolistic with a few big players but please note that ASML and Tokyo Electrion and Nikon are dominating in the lithographic equipment segment whereas Applied Materials, KLAC (KLAC), Lam Research (LAM), are dominating the remaining segments of the semiconductor equipment market with AM being the leader.
Fewer players means more pricing power potentially for Applied Materials. - Not a good time and gesture to have margin squeeze on its strategic partner - if it is the case - haha !
--------------------------------------------------------------------------
Applied Materials: Oligopoly Play At Cyclical Trough
Applied Materials (AMAT) is the world's largest semiconductor capital equipment company both in terms of value and sales. Semiconductor fabs are multibillion dollar factories where silicon chips that go into tablets and smartphones are made. These fabs house very specialized and complex equipment which are made by a handful of suppliers. Most of these companies are Japanese and US (ASML is an exception). Unlike other industries, the semiconductor capital equipment is a fairly stable industry with a massive moat. The Korean and Chinese companies have never managed to make inroads into the semiconductor capital equipment industry due to the high IP barriers. The growth in this industry has not been great, but it is safe from the competitive pressures unlike other sectors such as smartphones, tablets or PCs. KLAC (KLAC), Lam Research (LAM), AMAT and Tokyo Electron are the biggest players in the sector. They have a comfortable oligopoly with high margins. The industry has also been consolidating around the main players with Applied Materials buying Varian Semiconductor and Lam buying Novellus Systems.
We are positively biased towards Applied Materials because of its leading position in the "semicap" sector. The expenditure on the semi equipment is set to grow with the industry transitioning to smaller design nodes and shifting towards 450 mm wafers from 300 mm. Intel is already building out the first 10x nm node and plans to spend $2 billion on 450 mm wafers. Other companies such as Samsung and TSMC (TSM) will have to match Intel or get left behind. Intel (INTC) has already bought a big stake in one of the major semicap players ASML Holdings (ASML) to accelerate the technology advancement process.
Why we like AMAT
Technology Advantage - Applied Materials has a tremendous technology advantage in a number of areas such as implant, PVD, CVD, etc. While the company competes with KLAC and LAM in a number of these fields, we do not think the company is in any big danger of losing significant market share. The company is perfectly capable of making equipment for smaller design nodes which would require increasing complexity. The company spends almost 15-20% of its revenues on R&D every year to keep its technological lead.
Cyclical Trough - We think that Applied Materials is at the cyclical trough and its prospects should improve with increase in semi equipment spending. Management believes that the worst of the trough has passed and I believe them. The company's solar equipment revenues have fallen off a cliff (down 80%) and the only way to go is up. Display revenues should also go up in the 2nd half of 2013 as the industry recovers.
Industry Consolidation - Competitive dynamics in the semiconductor industry are improving with the Tier 2 players like Varian and Novellus being gobbled up by the Tier 1 players. This will help the top 5 companies to maintain prices and improve margins. We do not see any new entrant coming into the semicap market anytime soon because of the high industry barriers.
Decent Dividends - Applied Materials has kept on increasing dividends as the industry has matured. While the recent stock rally has decreased the yield from ~3% to 2.65% now, it is still a decent yield for a technology company. AMAT also operates in a less competitive space than other companies so it makes their yield much safer. Dividends have grown by 500% from 6 cents in 2005 to 34 cents in 2012.
Strong free cash flows - Applied Materials manages to earn an average of ~$1.5 billion in free cash flows every year as the capex requirements of the business are quite low. Though earnings in the last year were affected due to big restructuring charges, FCF was still quite strong.
Applied Material Risks
Solar Market Problems - The whole solar energy market has been hurt hard by the overcapacity in solar panels. Applied Materials has become the No.1 supplier of equipment to solar companies, through acquisitions. However, all has not been rosy for AMAT, which was forced to abandon its amorphous silicon thin film equipment line in 2009. The company has also sharply reduced spending on crystalline solar panel equipment after the whole market crashed. Pure play solar equipment companies like GTAT and Meyer Burgher are trying to survive this tough period.
Declining PC market - The PC market is showing declining revenues and volumes, as tablets cannibalize the laptop market. However, the growth of smartphones and tablets has managed to offset some of that growth decline. AMAT has been hurt from a decline in the memory segment revenues apart from slowing of the logic revenues.
Slow growth - Applied Material's revenue in 2012 was only 10% up from its 2004 level, despite the company having made major inroads into the Display and Solar equipment markets. However, the thing to remember is that the company plays in a cyclical industry which is going through a trough right now. Its revenues in 2011 were $10.5 billion. The company expects WFE equipment spending to range between -10% - 0% growth in 2013. Given Intel's capex announcement, I think that it will be on the higher end. However, there are global economic slowdown risks which also have to be taken into account.
http://seekingalpha.com/article/1204661-...e_readmore
Research, research and research - Please do your own due diligence (DYODD) before you invest - Any reliance on my analysis is SOLELY at your own risk.