Applied Materials Lost Share In Nearly All Its Core Semiconductor Equipment Businesses In 2015. What Does That Tell Us For 2016?

| About: Applied Materials, (AMAT)

Summary

In the semiconductor equipment market, Applied Materials lost market share between 2014 and 2015 in nearly all its core businesses.

The 3D NAND market will be a boom for semiconductor equipment, but other companies compete in this market with Applied Materials.

The merger between competitors Lam Research and KLA-Tencor will negatively impact growth for Applied Materials in 2016 resulting in further market share erosion.

For the quarter ended May 1, 2016 Applied Materials (NASDAQ:AMAT) reported $2.45 billion in sales and 34 cents earnings per share ex items, flat and up 17%, respectively, vs. the year-earlier quarter. Applied Materials guided to a 14%-18% quarter-over-quarter jump in current-quarter sales, implying $2.79 billion to $2.89 billion. Note the 17% QoQ growth was for the overall company's segments, which included Semiconductor, Display, Service, and Solar.

Let's take a look at the semiconductor equipment market, the core of AMAT's businesses, and then hone in on the top four core businesses.

I discussed in a recent Seeking Alpha article entitled "Semiconductor Equipment - Expect A Strong Q2" that revenues for the top 10 semiconductor equipment companies were up 5.4% QoQ (Q4 2015 to Q1 2016). I noted that AMAT grew 15.6%, but that growth was overshadowed by Nikon's (OTCPK:NINOY) 106.5% growth and Hitachi High Technologies (HITCY) 40.4% growth.

AMAT continues to hype growth in its deposition-etch equipment based on the potential for a large market for 3-D NAND. I discussed these activities in a May 2016 Seeking Alpha article entitled "A Shortage Of NAND Flash Memory Is Coming Soon - What Caused It And What Will Be Its Impact."

What AMAT purposely neglects to say is that a rising tide floats all ships. In other words, what's good for AMAT is also good for its competitors supplying equipment for 3-D NAND production, namely Lam Research (NASDAQ:LRCX), Tokyo Electron (OTCPK:TOELF), Hitachi High Technologies, and ASM International (OTCQX:ASMIY).

Most importantly, equipment to make 3-D NAND chips is already installed in fabs, so initial sales to Intel (NASDAQ:INTC), Samsung (OTC:SSNLF), SK Hynix (OTC:HXSCF) and Micron Technology (NASDAQ:MU) have already been reported. Once production ramps up, additional equipment will be purchased, but it remains to be seen how much in capacity purchases will be made in 2016.

So let's take a look at the two core businesses of AMAT focusing on 3-D NAND - deposition and etch, and hone in on a further breakout of deposition into chemical vapor deposition (CVD) and physical vapor deposition (PVD) or sputtering, and see how the company fared against its competitors in 2015.

Calculating 2014-2015 growth gets tricky, because many competitors are Japanese companies, and revenues generated and reported in Japanese Yen need to be converted to US dollars. I discussed this issue in a Seeking Alpha article in April entitled "The Semiconductor Equipment Market Is Quite Healthy, And No, Revenues Didn't Fall."

In 2015, the U.S. dollar appreciated 14.5% against the Japanese yen and 19.8% against the euro. So what I will do in this analysis is show growth rates in U.S. dollars and in the currency of the foreign country (yen or euro)

For etch:

Company

'14-'15 Growth Rate ($)

'14-'15 Growth Rate (country currency)

Applied Materials

17%

17%

Lam Research

28%

28%

Tokyo Electron

-17%

-2%

Hitachi High Tech

-16%

-1%

Source: The Information Network

Chemical Vapor Deposition:

Company

'14-'15 Growth Rate ($)

'14-'15 Growth Rate (country currency)

Applied Materials

8%

8%

Lam Research

12%

12%

Tokyo Electron

11%

25%

ASM International

4%

24%

Source: The Information Network

Physical Vapor Deposition:

Company

'14-'15 Growth Rate ($)

'14-'15 Growth Rate (country currency)

Applied Materials

-22%

-22%

Oerlikon/Evatec

50%

70%

Ulvac

-10%

5%

Canon Anelva

27%

41%

Source: The Information Network

On the face of published market share information, in U.S. dollars, AMAT fared better. But the reality is that conversion of yen or euro to dollars is an illusion, and readers and investors need to go to annual reports of foreign companies to show actual revenue growth.

Bottom line is that Applied Materials, despite its hyperbole about increased market share, actually lost market share to nearly every competitor in its core sectors.

To further show the weakness of AMAT management, there is another category I've added - Ion Implantation. When AMAT acquired Ion Implant equipment supplier VSEA in 2011, upper management of VSEA became upper management of AMAT. So it is a core sector for these people (and the reason they became AMAT employees), AMAT lost share to two of its three competitors as illustrated in the table below.

Ion Implantation:

Company

'14-'15 Growth Rate ($)

'14-'15 Growth Rate (country currency)

Applied Materials

18%

18%

Axcelis (NASDAQ:ACLS)

83%

83%

Sumitomo

6%

21%

Nissin

-15%

0%

Source: The Information Network

My Takeaway

I've written numerous articles in Seeking Alpha about Applied Materials, in addition to the ones mentioned in this article. I've pointed out that weak management has used hyperbole and spin in its press releases and conference calls to overshadow their inadequacies. Unfortunately I've also noticed in comments I've received that readers tend to disregard the statistics and analyses I present because they are not accepting reality.

Here's a simple illustration. AMAT stock popped after its recent conference call based on $700 million in orders, primarily display. I discussed this issue last week in a Seeking Alpha article entitled "Applied Materials Stock Bounced On Display Orders - But Is It Sustainable?" Note in the chart below that $700 million is a typical yearly revenue AMAT has been generating in the display sector for the past 10 years (although I only present the past three years). Revenues were $799 million in 2010 and $976 million in 2008, so there are normal fluctuations from year to year.

Company

Display Processing Tools

2013

2014

2015

Nikon

lithography

1211

947

929

Applied Materials

CVD

545

615

718

Canon

lithography

494

617

644

ULVAC

sputter, CVD

595

455

509

Tokyo Electron

coater/developers, etcher/ashers

258

309

329

Daifuku

automation

125

175

315

DNS

coater/developers

163

309

312

Shibaura

cleaner

238

198

218

Murata

automation

41

21

33

Hitachi High Tech

cleaner, developer, exposure, inspection,

71

0

0

Source: The Information Network

The $700 in orders doesn't necessarily mean that all will result in revenues in 2016 either. But the response surrounding the hype associated with the announcement caused the stock to jump 13%.

Looking at 2016, I see even further problems for AMAT. The merger between LRCX and KLA-Tencor (NASDAQ:KLAC) will enable LRCX to gain even further share, particularly in 3-D NAND. I discussed this in a previous Seeking Alpha article entitled "Making Sense Of The Lam Research - KLA-Tencor Merger."

So in response to the anticipatory naysayers in comments in this article, I say "caveat emptor." Believe the hype or believe my statistics and analysis, which I've been collecting since 1985.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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