Investment Club Presentation · 2019-05-24 · Notre Dame Investment Club Investment Club Presentation Company: Applied Materials (AMAT) Analyst: Jason Kidwell Buy Price Target: $47.72

Notre Dame Investment Club

Investment Club Presentation

Company: Applied Materials (AMAT)Analyst: Jason Kidwell

BuyPrice Target: $47.72

Upside: 19.96%

1 2 3 4Historically Cheap Industry Leader in R&D Diversified Product Portfolio Positioned for the Future

Notre Dame Investment Club

5 Year Stock PerformanceCURRENT STOCK PRICE as of 2/2/19: $39.35

Performance in the last five years:

AMAT: +135.01%

SMH: +141.77%

SPY: +55.06%

-50%

0%

50%

100%

150%

200%

250%

300%

2/3/2014 6/3/2014 10/3/2014 2/3/2015 6/3/2015 10/3/2015 2/3/2016 6/3/2016 10/3/2016 2/3/2017 6/3/2017 10/3/2017 2/3/2018 6/3/2018 10/3/2018

AMAT SMH SPY

Worries surrounding memory prices prelude the drop in stock price

Notre Dame Investment Club

Industry Overview

• This industry manufactures equipment used to produce semiconductors and computer chips (ICs)

• Growth opportunities in AI, Big Data, and the Internet of Things

• Constant innovation in the industry rewards those who spend in R&D

Semiconductor Equipment & Machinery Manufacturing Revenue Comparison ($BN)

Industry Competitive Forces

Threat ofNew Entrants:

LOW

Threat of Substitutes:

HIGH

Bargaining Power of Suppliers:MEDIUM

Bargaining Power of Customers:

MEDIUM

• Industry is characterized by rapid technological change.

• Success of firms depends on their ability to innovate

• Capital requirements to install and integrate new equipment

• Long-term relationships with their customers.

• Most customer transactions involve a high level of price negotiation

• Limited buyers and sellers

• Customers have a need to continuously update their products

• In transactions there remains a level of negotiation.

0 5 10 15 20

Applied Materials

ASML Holdin N.V.

Lam Research Corporation

Tokyo Electron

Notre Dame Investment Club

Chip Making Process Overview

Wafer Fabrication

Photolithography Etching

Laying Interconnects

Slicing Wafers Packaging

Silica Sand (base material) is purified into

Silicon Ingot

A layer of photoresist is spread across the wafer

A pattern of hard material is applied to the wafer

Layering and designing interconnect- transistors

connected

Chips on wafer tested-Wafer is sliced into dies

Dies are packaged and assume the familiar form factor of a desktop

processor

= AMAT Point of Production

Notre Dame Investment Club

Semiconductor Industry Value Chain

Semiconductor Equipment and

Machinery Manufacturer

Semiconductor & Circuit Manufacturers

Global Semiconductor & Electrical Product

Manufacturing

Notre Dame Investment Club

Company Overview

• The largest segment of Applied Materials, generating over 60% of the company’s revenue

• Manufacturing of equipment used in fabricating semiconductor chips• Wafers• Patterning equipment• Transistor fabrication

• Provides solutions to optimize equipment, fab performance, and productivity of customers

• No single region accounted for more than 30% of Service revenue for any of the past three years

• Fastest growing segment of AMAT, growing at an average of 39% YOY for the last three years

• Produce equipment used in manufacturing used in LCD and OLED displays

• The largest producer of wafer fabrication equipment (WFE), technology, and services to the semiconductor industry

• Holds more than 21% of market share in the WFE industry

• Has diversified revenue stream in as industry has matured

Applied Materials

Semiconductor Systems Applied Global Services Display and Adjacent Markets

AMAT Revenue Growth ($MM)

02,0004,0006,0008,000

10,00012,00014,00016,00018,00020,000

2013 2014 2015 2016 2017 2018

CAGR= 14.9%

Notre Dame Investment Club

Corporate Governance and Company LeadershipBoard Member Director Since Primary Occupation Independent

Thomas J. Iannotti 2005Chairman of the Board, Former Senior VP and GM of HP ü

Gary E. Dickerson 2013 President and CEO of Applied Materials

Judy Bruner 2016Former Executive VP and CFO of SanDisk Corporation ü

Eric Chen 2015Partner of SB Investment Advisors,former MD of Silver Lake ü

Aart J. de Geus 2007Current Chairman and Co-CEO of Synopsys, Inc. ü

Stephen R. Forrest 2008Head of the OptoelectronicsComponents and Materials Group atthe University of Michigan

ü

Alexander A. Karsner 2008 Managing Partner of Emerson Collective ü

Adrianna C. Ma 2015 Managing Partner at the Fremont Group ü

Scott A. McGregor 2018 Retired President and CEO of Broadcom ü

Dennis D. Powell 2007Retired Executive VP and CFO of CiscoSystems, Inc ü

Name Position Picture Description

Gary E.Dickerson

CEO & President

• More than 30 years of semiconductor experience

• 18 years at KLA-Tencor Corporation serving as president and chief operating officer

Dan Durn CFO

• Joined Applied in 2017 from NXP semiconductors where he was executive VP and CFO

• Previously served as a VP of technology IB at Goldman

Jay Kerley CIO

• Joined Applied Materials, Inc. in 2006

• Has more than 25 years of industry experience

Notre Dame Investment Club

Historically Cheap

• Bill Kennedy, Fidelity Research, Worldwide Fund: Portfolio Manager

• “Price to Sales actually looks quite cheap”

• “Every cycle gives higher highs and higher lows in operating income”

0x

1x

2x

3x

4x

5x

$0$10$20$30$40$50$60

2/28/2009

2/28/2010

2/28/2011

2/29/2012

2/28/2013

2/28/2014

2/28/2015

2/29/2016

2/28/2017

2/28/2018

Share Pr ice Price to Sales

• Market is too focused on the short term and is forgetting the big picture

• The time to buy is when the price is cyclically depressed

• Earnings are higher than they’ve ever been

Comparison of Stock Price and Price/Sales RatioPrimary Research

0x2x4x6x8x

10x12x14x16x18x20x

2/12/2014 2/12/2015 2/12/2016 2/12/2017 2/12/2018 2/12/2019

Historical EV/EBITDA RatioWhy Buy Now?

1

Notre Dame Investment Club

Importance of R&D

• Major innovations in the industry require large R&D expenditures by semiconductor companies

• As Moore’s Law slows, companies will have to innovate better ways to package computer chips

• Building the META Center, a new R&D center in New York

2,019

1,190

1,804

884

0

500

1,000

1,500

2,000

2,500

2013 2014 2015 2016 2017 2018

AMAT Lam Research ASML Tokyo Electron

• Increased demand means increased production for AMAT, the market leader in WFE

• Driven by the generation of 5G smartphones, server growth, and cloud growth

• In 2019, the industry should still match 2017, a previous all-time high

R&D Expense Comparison ($MM)

Projected WFE Industry Market Size ($BN)

Forward Looking Spending

What Wafer Fab Growth Means

2

0

10

20

30

40

50

60

70

2016 2017 2018 2019* 2020* 2021* 2022* 2023* 2024* 2025*

CAGR= 5.7%

Notre Dame Investment Club

Broad Product Portfolio

• Semiconductor Systems makes up just over 60% of AMAT’s revenue

• Display and Service segments growing

• Within Semiconductor Systems, revenue is diversified

0

5,000

10,000

15,000

20,000

2015 2016 2017 2018

Semiconductor Systems Applied Global Services

Display and Adjacent Markets Corporate and Other

24%

27%

36%

13%

Foundry

Dynamic random-accessmemory (DRAM)

Flash memory

Logic and other

Semiconductor Systems Revenue BreakdownPercent of Revenue from Semiconductor Systems

Revenue by Segment ($MM)A Broadening Product Portfolio

63%

100%

70%

93%

0%10%20%30%40%50%60%70%80%90%

100%

AMAT Lam ASML (2017) Tokyo Electron

3

Notre Dame Investment Club

Trend towards AI, Big Data, and IoT

• Artificial Intelligence: The theory and development of computer systems able to perform tasks that normally require human intelligence

• Big Data: The use of extremely large data sets analyzed computationally to reveal patterns, trends, and associations

• Internet of Things: The interconnection of computing devices in everyday objects, enabling them to send and receive data

3,222 4,819 7,345 11,28417,268

25,99637,987

53,231

70,972

89,847

0

20,000

40,000

60,000

80,000

100,000

120,000

2016 2017 2018 2019* 2020* 2021* 2022* 2023* 2024* 2025*

• Use of AI and Big Data to revolutionize medical treatment

• Use of IoT devices by natural gas companies to monitor leaks

• Using Big Data to make shopping more convenient and advertising more effective

• Building the META Center in NY specifically focused on innovating for the AI-Big Data era

• Industry leaders in cobalt products and tools used in photolithography and etching processes in chip making

• Direct contact with customers in the industry

Broadening Product Portfolio Projected AI Industry Market Size ($MM)

Applications in the Real World How Applied Fits

4

Notre Dame Investment Club

9%

30%

21%16%

14%

6%

5%United States

China

Korea

Taiwan

Japan

Europe

Southeast Asia

Headwinds

• Uncertainty in Asian markets is the biggest headwind at the moment• Import restrictions from China extremely unlikely

• AMAT memory customers have taken a more cautious approach to capital expenditure as they take a wait-and-see approach

• Decreased spending by memory customers

• Development of Extreme Ultraviolet Technology (EUV)

• Chinese customer (JHICC) currently banned from receiving US exports

1,3741,731

1,379 1,5982,159

4,9984,530

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019* 2020*

Location of Customer Facilities in 2018Uncertainty in Asian Markets

AMAT’s Operating Income Cycle ($MM)Further Risk Factors

Notre Dame Investment Club

Solutions and Tailwinds

• With the slowing of Moore’s Law, demand for memory equipment now has a floor

• The slowdown in miniaturization has led companies to invest in facilities, setting up future demand growth

• Offers better picture quality and image contrast than traditional LCD or LED screens

• Applied is developing equipment used in all OLED screens and for flexible substrates

• Companies using OLED include Apple, Samsung, and Sony

Projection of OLED Industry Market ($BN)

Number Manufacturer Segment1 China Foundry2 China Memory (DRAM)3 China Memory (NAND)4 GlobalFoundries Foundry5 Intel Logic6 Intel Memory (NAND)7 Micron Memory (NAND)8 Micron Memory (DRAM)9 Samsung Foundry/Logic10 Samsung Memory (DRAM)11 Samsung Memory (NAND)12 SK Hynix Memory (NAND)13 SK Hynix Memory (DRAM)14 SMIC Foundry15 Toshiba/WDC Memory (NAND)16 TSMC Foundry17 UMC Foundry

Memory Demand Floor Set Semiconductor Fab Projects in 2018 & 2019

Growth in OLED

17

2326

3033

3740

44

05

101520253035404550

2016 2017 2018 2019* 2020* 2021* 2022* 2023*

CAGR= 4.9%

Notre Dame Investment Club

Final Recommendation

Downside Case

Price Target: $38.36 Downside: -3.57%

Base Case

Price Target: $47.72Upside: 19.96%

Upside Case

Price Target: $53.20Upside: 33.74%

Applied Materials is trading at historically cheap values because the market is not thinking of the company’s long term opportunities. Therefore, I am recommending Applied Materials (AMAT) as a buy with a 19.96% upside at this point in time.

Recommendation

Share Price as of Feb. 10, 2019: $39.78

Notre Dame Investment Club

Notre Dame Investment Club

Appendix

Notre Dame Investment Club

Valuation - Comparable Companies Analysis

Notre Dame Investment Club

Valuation - WACC

Notre Dame Investment Club

Valuation – DCF(Base)

Notre Dame Investment Club

Valuation – DCF(Base)

Notre Dame Investment Club

Valuation – DCF(Upside)

Notre Dame Investment Club

Valuation – DCF(Upside)

Notre Dame Investment Club

Valuation – DCF(Downside)

Notre Dame Investment Club

Valuation – DCF(Downside)