Can Applied Materials' Stock Price Rise Even After Blockbuster Returns?
Semicon West, the largest trade show for semiconductor capital equipment, kicked off this week. Semiconductor equipment companies are hawking their wares. Buyers are expected to spend as much as $37 billion on new equipment this year.
Despite a 37% year-to-date jump, semiconductor manufacturerApplied Materials (AMAT) - Get Report may have room to move higher. Applied Materials is poised to take nearly half that spending on semiconductor equipment. With a 45% gross margin, the company could earn over $2.50 per share in 2018, up from $1.19 in 2015.
The stock can continue to move higher for a couple of reasons. First, Applied Materials reported second-quarter orders were $3.45 billion, up 52% sequentially and up 37% year over year. Backlog increased 34% to $4.17 billion. Even though second-quarter revenue rose just 0.3% to $2.45 billion, equipment makers trade on backlog and new orders, and this was one of the largest quarters we've seen in a long time. The company doesn't report its third quarter results until August 18, so there are still two weeks for the sales team to build backlog.
Second, Applied Materials' leadership position in 3D NAND tools is driving sales of the company's latest chemical vapor deposition equipment. AMAT's CVD and physical vapor deposition solutions are the tools of choice to make these complex semiconductors.
These high-capacity solid-state devices are taking the data storage world by storm. Intel's (INTC) - Get Report 3D NAND is said to be able to store 2 terabytes of data and could potentially store as much as 10 TB of data. Samsung (SSNLF) claims its 3D NANDs can store 15.36 TB. These new chips are three to five times faster than existing technology. 3D NANDs take up dramatically less space and use less a lot power than hard drives and are a must-have for any data center or cloud provider.
Third, organic light-emitting diode displays are quickly becoming the display technology of choice. The panels are dramatically thinner and lighter, which allow for slimmer devices or larger batteries. Samsung's Android phones already use them. Action Alerts PLUS holding Apple (AAPL) - Get Report is expected to include an OLED screen in the iPhone 7. OLED displays are used in the new curved 4K HD televisions.
OLED manufacturing is ramping up, and Applied's silicon nitride plasma enhanced PECVD and PVD products are the go-to technology to make sheets of OLED displays. Applied's machines can crank out 5' x 6' sheets of OLED panels with 8.3 million pixels per inch.
Because of the advantages of OLED over other types of displays, the OLED market is expected to expand from $1.5 billion in 2015 to as much as $16 billion by 2020. The displays will be used in everything from mobile phones to avionic displays to personal computers and television sets. Analysts at Cowen estimate OLED display makers will have to spend as much as $9 billion just to satisfy Apple's display needs for the 2017 to 2018 time frame.
Although display is just 8% of Applied Materials' revenue, it is expected to grow 31% and exceed $1 billion in revenue.
The semi equipment makers trade on future bookings, and earnings per share matter very little to investors here. I think Applied can simply trade to $30 on pure order momentum.
The company reports its third quarter on August 18, and management will hit the tech investor circuit in September, which should keep the excitement going. I think Applied Materials can manufacture a higher price.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.