AMAT reports strong Q and even better guidance

The display business which had been less than reliable in years past has come up with back to back home runs. Applied is growing both its top and bottom line at well above the sluggish market rates and is clearly the growth leader in the industry right now. Its a very nice combination of obvious share gains, good new products, being in the right place at the right time and nice execution. Financials are at an all time high

Driven by conversion inflection points in display, OLED and 7NM OHHHHLED displays…
The inflection point in the display business is the industry conversion to OLED which is running at a rapid pace and will likely drive orders for a while as we are just at the begining of a conversion cycle. Management suggested that OLED was three times larger than prior display business.

3D NAND continues its strength…
The company bragged about a 7 point share gain in 3D NAND with the market for tools up roughly 40% versus last year. This is a very strong performance as Applied hasn’t done as well as competitors in the past in the NAND market but is doing a great job of making up for it in the conversion to 3D. DRAM remains the weakest segment and is off by 25%.

7NM is going to be “HHHUUUGE”….
Applied confirmed what we have heard and previously reported, that 7NM will be a strong node, much stronger than the 10NM node. GloFo is skipping 10NM altogether and we think that the Samsung and TSMC will catch up, if not even pass Intel at 7NM. Logic remains depressed in terms of spend with foundry up about 5-10%.

Blowout Guidance…
Management guided for sales to be up 15 to 19% in the current quarter with semi biz up 10-23%, service up 3-6%, display up a whopping 35-40%. EPS is expected to come in at a record breaking $0.61 to $0.69. All this outperformance in a WFE spending market that is little more up than flattish overall.

New tools should keep growth growing…
Applied is in the early stages of a number of new products that have all had excellent initial success with great ramps. This success is across many market segments and should prove long lived

Gross margin the only soft spot…
The only soft spot on the call were questions about gross margin progress and goals. While progress continues, investors would like to see more faster. Given where we are in product sales and goals of share gain , gross margin may be a bit slow to come around.

Leader of the pack…
Right now, Applied is the momentum leader in the industry , followed by a strong KLAC with LRCX and ASML doing OK but having their own unique issues. This is a significant role reversal from a couple of short years ago from Applieds nadir when it hit rock bottom after the failure of the TEL deal.

Better off alone???
We could easily argue that AMAT is better off not having done the TEL deal as their stand alone performance has been better than we would have expected when weighted down by the baggage of the TEL deal. Maybe the regulatory agencies did them a favor.

#NEVER EUV
The rest of the industry, including Applied, has benefited from the lack of EUV and need for multi patterning. This is not going to change any time soon as Mark Bohr, CTO of Intel, admitted this week at Intel IDF that Intel will not likely use EUV at 7NM, and only use EUV when its ready for prime time which it very obviously isn’t.

This is obviously no surprise at all to us as we have been the most vocal analyst about the delay of EUV, but it was obviously a surprise to some naive analysts who believe the party line as ASML’s stock was down this week on the news.

The Stocks…
A $30 stock price seems in the cards in the near term for Applied. We see no reason to get off the train as there is no slow down in sight. Longer term we may keep an eye out for an eventual display slow down but not for a while.

Applied’s performance should generally be a rising tide for all ships in the semi equipment ocean, but we would remind investors that Applied’s gains are coming from somewhere, like from Lam in etch and Dep, KLAC in E Beam, and ASML in multipatterning.