This article was written by Kwon Sok Oh, a Financial Analyst at I Know First.

AMAT Stock Forecast

(Source: Wikimedia Commons)

“Applied has the broadest opportunity across major technology trends, and our markets are strong, with long-term growth drivers firmly in place.”

• Gary Dickerson, CEO, Applied Materials, Inc.

Summary

• • • Applied Materials deliver record breaking performance for Q2 FY2018
    • Market trends point toward strong growth for the coming years
    • Major breakthrough with cobalt to enhance chip performance for big data and AI
    • I Know First’s algorithm’s bullish forecast on Applied Materials

Applied Materials deliver record breaking performance for Q2 FY2018

On May 17th, Applied Materials (NASDAQ: AMAT) reported record high revenue, operating profit, and earnings per share during its earnings call for Q2 FY2018. Revenue grew by 29 percent year-over-year, achieving a record $4.57 billion. Applied Materials’ gross margin increased to 45.8 percent, a 0.7 point year-over-year increase. Operating profit grew 41 percent to $1.33 billion, and earnings per share grew 43 to a record $1.09. Moreover, Applied Materials return $2.6 billion to shareholders, $2.5 billion (4 percent of shares outstanding) of which was through share repurchases. Dividends accounted for $105 million. “Applied’s performance in the second fiscal quarter was another all-time record for the company, which demonstrates strong execution and customer pull for materials solutions that help accelerate roadmaps and bring new devices to market faster,” said Gary Dickerson, CEO, Applied Materials, Inc.

(Source: Pixabay)

As part of its capital allocation strategy, Applied Materials pays out quarterly cash dividends. On February 14th, Applied Materials announced an increase in dividend payments from $0.1 per share to $0.2 per share, the first of which will be payable on Jun 14th. On June 7th, Applied Materials announced its second round of $0.2 per share dividend payments scheduled to be on September 13th.

Market trends point toward strong growth for the coming years

As markets remain healthy and strong, Applied Materials projects that revenue will increase to a range between $4.33 billion and $4.53 billion for Q3 FY2018, which translates into an average of 18 percent year-over-year growth. According to Michael Sullivan, head of investor relations, Applied Materials Inc., even though smartphone sales were below expectations for Q2 FY2018, smartphones are still long-term drivers of capacity and technology. For instance, forecasts from Applied Materials’ customers imply that average yearly growth for the mobility market will be 20% for DRAM’s and 35% for NAND’s in the coming three years. Moreover, the advent of big data and artificial intelligence has caused data centers to demand more server DRAM’s and AI leadership to demand more high-performance computing hardware.

(Source: Pixabay)

Building on these market trends, Applied Materials forecasted that demand for its NAND investments will be increase by 40% this year. Moreover, due to the constant rising demand for high-performance DRAM’s used for data centers, the demand for Applied Materials’ DRAM investments are in turn increasing. In semiconductor, Applied Materials expects that it will grow faster than the market based on the opportunities created by the innovations on 3D structures and advanced packaging, new materials, and novel methods to shrink chip dimensions while maintaining both placement and resolution. Regardless of the progress of EUV lithography adoption, the development of the self-aligned multi-patterning techniques SADP and SAQP promise resolution solutions, and new materials enable patterning approaches to solve placement errors.

Finally, for display, there is still substantial investments for large substrate Gen 10.5 TV’s, and OLED remains as an attractive technology as more handset makers are transitioning to OLED. Applied Materials expects displays to grow by more than 30% in 2018.

Major breakthrough with cobalt to enhance chip performance for Big Data and AI

On June 5th, Applied Materials made an announcement regarding a breakthrough in chip performance, power, area and cost (PPAC) by using cobalt. The classic Moore’s Law has recently reached a dead end because materials such as tungsten and copper are not scalable beyond the 10nm limit for foundry nodes. The electrical performance of tungsten and copper has reached their inherent physical limits regarding transistor contacts and local interconnects, respectively, hindering the performance potentials of FinFET transistors. Applied materials has overcome this bottleneck through the use of cobalt.

Surge in Stock Prices on June 5th following Applied Materials’ announcement

(Source: Yahoo Finance)

Applied Materials has pioneered the first conducting material change in 20years, allowing customers to increase chip performance beyond the 7nm limit for foundry nodes. Cobalt has a variety of favorable properties making such a breakthrough possible. Cobalt has lower resistance at small dimensions compared to copper and has excellent gap fill capability. Moreover, cobalt is compatible with thinner lines on barriers, so larger volumes in available space will be possible. For instance, at the 15nm critical dimension, cobalt has a conducting volume 3.7 times that of tungsten, which translates to a huge improvement in performance. Furthermore, cobalt’s improved reliability compared to copper allows customers to overcome the challenge of copper interconnects within smaller dimensions. Finally, cobalt gives way to production friendly technology, which allows customers to transition into cobalt more easily than they had to do when making the transition into copper 20 years ago.

Top Left: Copper; Bottom Left: Tungsten; Right: Cobalt

(Source: Copper: Flickr; Tungsten, Cobalt: Wikimedia Commons)

More specifically, to utilize cobalt as a solution conducting material in transistor contacts and local interconnects, Applied Materials cleverly integrated pre-clean, PVD, ALD, and CVD material engineering steps for the Endura platform. Furthermore, other technological progresses using cobalt suite include anneal on the Producer platform, e-beam inspection for the Provision platform, and planarization on the Reflexion CMP platform. In conclusion, Applied Materials’ technological advancement allows chip designers to use cobalt instead of copper and tungsten to improve performance by 15%, and such enhancement in chip performance will meet market needs for better chips in big data and AI.

Currently I Know First’s algorithm is bullish for Applied Materials in the long run 

Currently, I Know First’s algorithm has a bullish outlook on AMAT for times frames of 1 month, 3 months, and 1 year. The forecasts for all time frames have predictability ratings of over 0.5, which is a very high predictability rating. Moreover, forecasts for longer time frames have stronger signals and higher predictability ratings, further supporting I Know First’s algorithm’s bullish stance on AMAT.

Past I Know First Success with Applied Materials

On October 5th, 2015, I Know First’s algorithm made a bullish forecast on AMAT for a time frame of one year. As shown below, during the time period from October 5th, 2015 to October 5th, 2016, AMAT grew by 104.15%, confirming I Know First’s algorithm’s forecast.

How to interpret this diagram

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