Runnymede's Andy Wang notes that not all semiconductor innovation occurs at the leading edge while reviewing Applied Materials earnings with Nicole Petallides, host of The Watch List.

Applied Materials (AMAT) 

  • Strength in Trailing-Edge: IoT, Communications,  Automotive, Power and Sensors
  • Share Gains in Memory to Drive to material outperformance in 2023
  • China is a risk factor to all semi companies should USA regulation limit China’s orders 

Applied Materials' (AMAT) has strength in trailing-edge IOT, communications, automotive, power and sensors, notes Andrew Wang. He and Noah Hamman give an overview of AMAT's earnings. Andrew mentions that AMAT's share gains in memory to drive to material outperformance in 2023. He also highlights that China is a risk factor to all semi companies. Noah talks about how AMAT could start to feel the tailwind from enhanced demand for A.I. server and a narrower scope of the tech export ban on China could also mitigate the concerns on revenue impact. They look at AMAT in relation of other semiconductor stocks including Nvidia (NVDA), AMD (AMD), Qualcomm (QCOM), and Onsemi (ON). Tune in to find out more about the stock market today.

Semiconductors have outperformed major indexes in 2023 because of investor interest in artificial intelligence. Four years ago, Applied Materials formed ICAPS, a horizontal business unit that harnesses all of Applied’s technologies to bring focus to specific vertical markets. ICAPS stands for IoT, Communications,  Automotive, Power and Sensors. As the products we use get smarter each year, they demand more silicon content, most of which is not leading-edge logic and memory. 

If advanced logic and memory are like the brains of a computing system, then ICAPS devices are like the eyes, ears, noses and skin—each essential to life in a digital world. This area is supported by multiple secular tailwinds including industrial automation, electric vehicles, advanced driver assistance systems, solar and wind energy, and IoT). Applied Materials management believes spending across its ICAPS business will remain robust through CY2024. 

Despite ongoing weakness in the Memory market, Applied is gaining share in DRAM: The company’s DRAM systems revenue increased ~45% qoq in the July and is expected to grow >60% qoq in the October quarter. The company expects its advanced packaging business to double over the next 3-4 years from its current annual run-rate of ~$1bn. 

A risk all semiconductor companies face is China. In recent quarters, we have seen China ordering aggressively to fill order books in an effort to get ahead of US regulations that could clamp down on China’s orders of semiconductor equipment. When regulations are implemented, Applied’s order book will decelerate or face difficult comparisons. In the near term, there could be a possible correction in semi stocks if the US manages to keep China out of the semi market. Longer term, though, the semiconductor sector is consolidated and oligopolistic. Keeping China out of the market would benefit pricing for the sector making it attractive for investors. 

With big tech dominating performance this year, it’s important to practice a balanced investment approach. If you do not own big tech, don’t fall victim to fear of missing out.  

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What do you think of semiconductors and the AI driven tech cycle?