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AMAT has good Q2 with great orders and great guide!

Robert Maire

Moderator
NAND + China + Display + Share gains = higher growth. Applied gets its MoJo back- All cylinders on line!

Applied reported revenues for its fiscal Q2 (April) of $2.45B and EPS of $0.34 jsut above street of $2.43B and $0.32. Orders were up a whopping 52% Q/Q and 37% Y/Y to a 15 year high of $3.45B. Most of the upside was driven by strong display orders focusing on OLED while silicon Systems was up a nice 15% Q/Q. 3D NAND remains the big driver of silicon as we have heard from other players in the market as the industry continues to covert from planar over the course of 2016. Foundry was lackluster and overall capex looks to be flat year over year.

Applied gets it MoJo back...
We have been concerned about Applied getting its act back together and finding its way after the failed TEL merger. We are happy to report that AMAT seems to have very much gotten over it and seems to be on a great trajectory. Part of the improvement is the good luck of having many markets in a positive trend and part is the change in focus, investment in technology and hard decisions that have paid off. We think AMAT has likely regained most of its prior momentum and now is likely the momentum leader in the industry.

Displays drive the quarter...
Display orders jumped from $183M in Q1 to a huge $700M accounting for the vast majority of all the backlog, orders and upward guidance, easily eclipsing the core semiconductor business. While the display industry has been very cyclical and volatile over time, when its good its very good. When its bad its very bad.

3D NAND helps Applied like it helps everyone else- A $1B NAND order quarter...
NAND was roughly half of AMATs silicon business as DRAM continued its dive with foundry logic sliding as well. It appears that 2016 will go down in history as the year of 3D NAND with a 10nm subtitle. We think NAND spending should easily continue throughout 2016 and into 2017. Were it not for NAND it would be a crummy year as foundry, logic and DRAM are all down and not looking like that will change either.

Share gain continues...
Applied continued to claim "strong share gains" virtually across the board and in the much disputed etch space. Given Applied's results and orders there has to be a lot of truth to the share gains despite not giving specific numbers or examples and talking in generalities. We think its clear that Applied has gained share in several different markets and seems to have some good momentum with new markets. We would repeat our caution that Applied may have gained some business based on aggressive pricing as they mentioned the lower margins specifically in their new etch business.

Technology driven buys versus capacity driven buys...
We are happy to hear that technology changes and inflections are a big part of the drivers. The company talked about roughly half of 2016 spend being aimed at 10nm and advanced 7nm.

The China Champion...
Applied has historically had a large operation and an advantage in China which is now serving it well. A few months ago Applied announced new investments in China that look to be paying off with increased business. China will continue to be an area of semiconductor strength with both domestic as well as foreign investment for production facilities inside China. We think Applied likely will continue to have an advantage in this regard

Financials support a better stock price...
Its looking like Applied is headed to record earnings in 2016 with a $2 EPS baseline which should help keep the stock from dropping back into the teens where it seems to have spent a lifetime (or at least it felt that way...). Applying a very conservative 10X multiple should keep it at least in the low $20's. Part of the better EPS is due to share buy backs but it doesn't matter as it improves shareholder value just the same. The key to getting to the next level, mid $20's and above is likely getting its margins back a a better level that would support a higher bottom line. This may prove a bit tougher.

All cylinders firing...
Service continues to be the over looked steady performer of the company. Combined with a resurgence of display and good silicon performance without the drag of solar equals good results. It has been a while since everything was good at the same time. If foundry/logic and DRAM came back this could look like a $30 stock. However we have to temper that with the view that if NAND were take a turn for the worse we could be back to teenage land.

The stocks...
AMATS stock is obviously headed north but likely won't drag Lam and KLA with it as Applied benefit may at least partially be at Lam's expense. The recent DOJ second request on the KLAM merger also puts the merger concerns on the other foot now with Lam under pressure to get the deal done. KLA also reported great orders but perhaps a bit more driven by early spending on foundry/logic that AMAT has yet to see. Lam saw a bit of an air pocket and could use KLA's order book to get better growth. Given that much of AMAT's upside came out of display, it would be a mistake for investors to bid up silicon based equipment names.

We don't see any benefit for ASML as litho continues to lag.

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