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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
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Notre Dame Investment Club
5 Year Stock PerformanceCURRENT STOCK PRICE as of 2/2/19: $39.35
Performance in the last five years:
AMAT: +135.01%
SMH: +141.77%
SPY: +55.06%
-50%
0%
50%
100%
150%
200%
250%
300%
2/3/2014 6/3/2014 10/3/2014 2/3/2015 6/3/2015 10/3/2015 2/3/2016 6/3/2016 10/3/2016 2/3/2017 6/3/2017 10/3/2017 2/3/2018 6/3/2018 10/3/2018
AMAT SMH SPY
Worries surrounding memory prices prelude the drop in stock price
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Notre Dame Investment Club
Industry Overview
• This industry manufactures equipment used to produce semiconductors and computer chips (ICs)
• Growth opportunities in AI, Big Data, and the Internet of Things
• Constant innovation in the industry rewards those who spend in R&D
Semiconductor Equipment & Machinery Manufacturing Revenue Comparison ($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
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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
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Semiconductor Industry Value Chain
Semiconductor Equipment and
Machinery Manufacturer
Semiconductor & Circuit Manufacturers
Global Semiconductor & Electrical Product
Manufacturing
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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%
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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
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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$60
2/28/2009
2/28/2010
2/28/2011
2/29/2012
2/28/2013
2/28/2014
2/28/2015
2/29/2016
2/28/2017
2/28/2018
Share Pr ice Price to Sales
• Market is too focused on the short term and is forgetting the big picture
• The time to buy is when the price is cyclically depressed
• Earnings are higher than they’ve ever been
Comparison of Stock Price and Price/Sales RatioPrimary Research
0x2x4x6x8x
10x12x14x16x18x20x
2/12/2014 2/12/2015 2/12/2016 2/12/2017 2/12/2018 2/12/2019
Historical EV/EBITDA RatioWhy Buy Now?
1
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Notre Dame Investment Club
Importance of R&D
• Major innovations in the industry require large R&D expenditures by semiconductor companies
• As Moore’s Law slows, companies will have to innovate better ways to package computer chips
• Building the META Center, a new R&D center in New York
2,019
1,190
1,804
884
0
500
1,000
1,500
2,000
2,500
2013 2014 2015 2016 2017 2018
AMAT Lam Research ASML Tokyo Electron
• Increased demand means increased production for AMAT, the market leader in WFE
• Driven by the generation of 5G smartphones, server growth, and cloud growth
• In 2019, the industry should still match 2017, a previous all-time high
R&D Expense Comparison ($MM)
Projected WFE Industry Market Size ($BN)
Forward Looking Spending
What Wafer Fab Growth Means
2
0
10
20
30
40
50
60
70
2016 2017 2018 2019* 2020* 2021* 2022* 2023* 2024* 2025*
CAGR= 5.7%
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Broad Product Portfolio
• Semiconductor Systems makes up just over 60% of AMAT’s revenue
• Display and Service segments growing
• Within Semiconductor Systems, revenue is diversified
0
5,000
10,000
15,000
20,000
2015 2016 2017 2018
Semiconductor Systems Applied Global Services
Display and Adjacent Markets Corporate and Other
24%
27%
36%
13%
Foundry
Dynamic random-accessmemory (DRAM)
Flash memory
Logic and other
Semiconductor Systems Revenue BreakdownPercent of Revenue from Semiconductor Systems
Revenue by Segment ($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
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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 ($MM)
Applications in the Real World How Applied Fits
4
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Notre Dame Investment Club
9%
30%
21%16%
14%
6%
5%United States
China
Korea
Taiwan
Japan
Europe
Southeast Asia
Headwinds
• Uncertainty in Asian markets is the biggest headwind at the moment• Import restrictions from China extremely unlikely
• AMAT memory customers have taken a more cautious approach to capital expenditure as they take a wait-and-see approach
• Decreased spending by memory customers
• Development of Extreme Ultraviolet Technology (EUV)
• Chinese customer (JHICC) currently banned from receiving US exports
1,3741,731
1,379 1,5982,159
4,9984,530
-1,000
0
1,000
2,000
3,000
4,000
5,000
6,000
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019* 2020*
Location of Customer Facilities in 2018Uncertainty in Asian Markets
AMAT’s Operating Income Cycle ($MM)Further Risk Factors
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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%
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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
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Notre Dame Investment Club
Appendix
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Valuation - Comparable Companies Analysis
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Valuation - WACC
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Valuation – DCF(Base)
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Valuation – DCF(Base)
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Valuation – DCF(Upside)
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Valuation – DCF(Upside)
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Valuation – DCF(Downside)
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Notre Dame Investment Club
Valuation – DCF(Downside)