Applied Materials' Earnings Not Impacted By Lam-Novellus Merger - Yet

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 |  About: Applied Materials, Inc. (AMAT)
by: Robert Castellano

Comments in the press and on the Internet about the Lam Research (NASDAQ:LRCX)-Novellus (NASDAQ:NVLS) are still being written, probably in light of earnings season coming up. Much of the speculation centers on the impact of the merger on Applied Material’s (NASDAQ:AMAT) earnings and even more so on theories that Applied Material will lose business with Intel (NASDAQ:INTC) because Lam has a long standing relationship with the deep-pocketed chip giant.

We have been analyzing the semiconductor space since 1985, and the table below is part of our database. In it I address the major semiconductor equipment segments where Applied competes directly with either Lam or Novellus. The years 2000, 2005, and 2010 were chosen at random and merely represent a 5 year span. Again, these are major segments, because within most there are subsectors, such as metal, dielectric, and polysilicon etch.

  • In the Plasma Etch segment, Lam has continued to gain market share over the past 5 years. Not against Applied, but other competitors, primarily Tokyo Electron.

  • In the CVD (chemical vapor deposition) segment where Applied competes with Novellus, market shares of these two companies have been steady over the past five years.

  • In the PVD (physical vapor deposition or sputtering) segment, Applied gained share at the expense of Novellus and other competitors.

  • In the ECD (electrochemical deposition), Applied lost significant share to Novellus by 2005, but regained share by 2010 with the acquisition of Semitool.

  • In the CMP (chemical vapor deposition), Novellus entered the market in 2002 with its acquisition of SpeedFam-IPC, but subsequently dropped out of the business in 2009.

Plasma Etch

2000

2005

2010

Applied Materials

36.6%

20.6%

20.5%

Lam Research

26.3%

34.3%

47.6%

Others

37.1%

45.1%

31.9%

CVD

2000

2005

2010

Applied Materials

68.2%

58.6%

60.2%

Novellus

23.8%

33.9%

32.8%

Others

8.0%

7.5%

7.0%

PVD

2000

2005

2010

Applied Materials

81.4%

76.3%

82.9%

Novellus

2.8%

8.7%

6.6%

Others

15.8%

15.0%

10.4%

ECD

2000

2005

2010

Applied Materials

31.2%

7.7%

20.9%

Novellus

33.3%

78.0%

79.1%

Others

35.5%

14.3%

0.0%

CMP

2000

2005

2010

Applied Materials

72.3%

94.9%

97.3%

Novellus

0

3.3%

0

Others

27.7%

1.8%

2.7%

Click to enlarge

These data bring us to the question of whether Applied will lose market share to Novellus because of the merger, particularly at Intel. Our response is a big NO. Based on the observations in these data, if Novellus hadn’t gained share in the past 5 years, then clearly Applied is doing something right by continuing to optimize its equipment, processes, and personnel. Not that Novellus was doing anything wrong, by any means. Because if it was, its shares would have plummeted- and they didn’t.

Secondly, companies like Intel got to be as big as they are because they too do most things right. One is their concept of “best-of-breed”, in which they evaluate all equipment on the market at every technology node and purchase based on the overall performance – the “best-of-breed”. Intel chose Lam for etch because it considers its tools the “best-of-breed”, and Applied for its CVD, PVD, and CMP tools because these were the “best-of-breed”. Just because Lam acquired Novellus will not mean that Intel will automatically replace Applied equipment with those from Novellus – yet.

And that brings me to another point. Lam clearly knows how to make etch equipment. The company will soon begin to channel its way of designing and building etch equipment into Novellus’ legacy deposition equipment, and most likely enhance the equipment, processes, performance, cost-of-ownership of these tools. Just how long until this is translated to market share gain depends on Applied Materials.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.