Applied Materials Lost Market Share To Nearly All Major Competitors In Its Recent FYQ2

| About: Applied Materials, (AMAT)

Summary

Applied Materials meager 11.8% QoQ growth in its recent FYQ2 report indicates that the company lost market share to major competitors.

In the much heralded 3D NAND business for deposition and etch equipment, AMAT lost share to main competitor Lam Research as well as Korean equipment vendors.

AMAT reported that its display sector dropped 7.3% QoQ as the company is replacing its failed PECVD encapsulation systems with a roll-to-roll technology.

Applied Materials (NASDAQ:AMAT) reported Q2 2017 earnings on Thursday May 18. The company reported a 129% YoY growth for the company. But taking a closer look, QoQ were significantly lower, which the company neglected to mention. In fact, the company lost market share in the semiconductor sector to nearly all major competitors.

In addition, the company reported negative growth QoQ in its much heralded Display sector.

Let's take a closer look. The table below shows QoQ revenue growth for AMAT and its competitors in the semiconductor sector.

CY2017 Q1

CY 2016Q4

% Change

Currency

AMAT

2404

2150

11.8%

1M $

LRCX

2146

1882

14.0%

1M $

KLAC

911

878

3.8%

1M $

TEL

243.5

179.3

35.8%

1B Yen

Hitachi High Tech

329

346

-4.9%

100M Yen

Screen

63.7

50.6

25.9%

1B Yen

ASMI

144.5

172.6

-16.3%

1M Euro

Wonik

121.7

73.9

64.7%

1B Won

TES

63.8

56.9

12.1%

1B Won

Eugene Tech

34.0

15.0

126.7%

1B Won

Axcelis

86.9

69.4

25.2%

1M $

Source: The Information Network (theinformationnet.com)

All companies with the exception of KLA-Tencor (NASDAQ:KLAC) and Axcelis (NASDAQ:ACLS) are competitors in the deposition or etch sectors. AMAT only competes against KLAC in three product lines in the inspection/process control sector out of the nearly 20 product lines, according to The Information Network's report "Metrology, Inspection, And Process Control In VLSI Manufacturing."

The major competitor to AMAT in this table is Lam Research (NASDAQ:LRCX). The two companies compete in the deposition and etch sectors and 3D NAND from Samsung Electronics (OTC:SSNLF), SK Hynix, and Micron Technology (NASDAQ:MU) is a big consumer of the technology. I discussed this technology in a November 21, 2016 Seeking Alpha article entitled "3 Takeaways From Applied Materials' Bullish Guidance For Q1 2017."

I also reported in a February 23, 2017 Seeking Alpha article entitled "New Technologies Are Eroding Applied Materials' NAND And Display Revenues," that AMAT was losing share to Korean suppliers in the 3D NAND space at SSNLF and SK Hynix. These companies include Wonik (64.7% QoQ growth), Eugene Technology (126.7% QoQ growth) and TES (12.1% QoQ growth). These companies are listed in the table above. I will discuss the Display business below)

Tokyo Electron (NYSE:TEL) the object of AMAT's failed takeover a few years, is a major competitor of AMAT in the etch business, but also competes against the company in LPCVD (low pressure chemical vapor deposition) and RTP (rapid thermal processing). TEL grew 35% QoQ in the semiconductor sector.

ASM International continues to have pressure in the ALD (atomic layer deposition) business and dropped 16.3% QoQ while Japan's Hitachi Technologies dropped 4.9% in the combined etch and process control sectors. Japan's Screen Semiconductor competes against AMAT in the RTP sector and grew 25.9%.

Reasons for poor performance

Investment house analysts that continued to issue buy signals for AMAT prior to the company's announcement failed to recognize that AMAT's largest customers had rather poor performance in Q1 2016. These include foundries TSMC (NYSE:TSM) (revenues down 33.8% QoQ), UMC (NYSE:UMC) (revenues down 6.5% QoQ), and VIS (revenues down 4.6% QoQ), and Intel (NASDAQ:INTC) (revenues down 9.8% QoQ).

AMAT also promotes China as a major driving force for semiconductor sales but China foundry SMIC also saw revenues down 2.7% QoQ.

Investor Takeaway

I've tried to explain in numerous Seeking Alpha article that a rising boat does not raise all ships. For example, after strong earnings growth from LRCX last month for the recent quarter, the stock jumped 6.58% the next day while AMAT jumped 3.81% and KLAC rose 2.09%

I've also explained that investment bank analysts don't do sufficient homework but instead rely on comments made by AMAT executives, whom I said were long on hyperbole but short on innovation.

For example, UBS analyst Stephen Chen reiterated a Buy rating and $44 price target on Applied Materials, suggesting China will be a key region for the company following upbeat tone at China Semicon.

"Applied had an upbeat tone at its technical presentation at China Semicon. Applied's focused on customer migration from 2D to 3D-NAND; highlighted its new tools including Precision CVD, Sym3 Etch, Selectra Etch. We believe Applied can benefit from higher capex by indigenous China fabs going forward. One area that we will keep monitoring is competition from local China semicaps who are trying to sell more to local fabs. However, our checks at the show found local Chinese semicap companies have mostly sold small amounts of equipment to local China fabs."

Clearly he didn't look at SMIC's negative revenue growth or the fact that China retail, investment and industrial production growth soften in April. Industrial production saw a marked drop pf 0.9% for a growth of 6.5% YoY, well below expectations of 7.1%. Instead he relied on AMAT's upbeat comments (hype) at a trade show rather than search out statistics.

Also note from AMAT's comments the word "new tool." In fact, these are just minor improvements in equipment that AMAT has had on the market for several years. As an example of lack of innovation, when AMAT acquired VSEA a few years ago and all the VSEA executives then became AMAT executives, including CEO and CFO, the company has not upgraded its high current (HC) implanters that were acquired from VSEA in 2011! The ribbon technology cannot compete against Axcelis' Purion systems, which use a spot beam and provides better performance for high aspect ratio vias on a chip while at the same time producing less contamination. I discussed how AMAT has lost implant share to ACLS in an April 3, 2017 Seeking Alpha article entitled "Applied Materials' Implant Business Sputters With Decline In DRAM Spend."

By the way, as shown in the table above, ACLS exhibited QoQ revenue growth of 25.2%

AMAT's Display Sector

In addition to the above referenced Seeking Alpha article I wrote on AMAT losing share to Korean vendors in display, I pointed out in a September 29, 2016 Seeking Alpha article entitled "Samsung And LG Move To ALD For Flexible OLEDs, Could Push Applied Materials Out Of The Market."

AMAT also reported revenues for its Display sector of $391 million, down QoQ of 7.3%. I asked the question in a May 24, 2016 Seeking Alpha article entitled "Applied Materials Stock Bounced On Display Orders - But Is It Sustainable?" I guess that question has been answered.

Now I've learned that AMAT is working on a roll-to-roll machine that replaces its ill-fated PECVD technology for flexible OLED encapsulation. The major competitor for this technology is 3M (NYSE:MMM). As I pointed out in the above article, the system used is vintage 2000 that AMAT acquired from AKT and was recycled for its solar business and further recycled for OLEDs. So much for innovation.

I don't own stock in any company mentioned in this article.

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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Tagged: , Semiconductor Equipment & Materials, Earnings
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