AMAT talks long term AI but short term is ugly

We attended Semicon West Monday and Tuesday, the annual show for the semi equipment industry. Its very clear from discussions with all our sources in the industry that confirm that Samsung has put the brakes on spending on memory and that message was reinforced by declines in their expected profitability due to weaker memory pricing. We maintain that a near term shipment drop of 25% for Lam and 10%-15% for AMAT is probable.

As we have said before, it is not possible for the rate of memory spending to continue at such high levels. Although demand has remained good, pricing of both NAND and DRAM has softened even though still quite profitable for memory makers. Samsung is taking prudent steps to slow spending.

Applied had no comments about short term trends in the industry . LAM & KLA were not having events so no other near term official commentary.

AMAT had a “feel good” series of presentations about AI being a major driver for chips and therefore chip equipment but unfortunately the long term positives of AI and big data are offset by the near term negatives of slowing memory spend and China trade issues.

While we certainly agree about the great long term prospects of AI for the entire chip and chip equipment industry (not just AMAT) it is the near term issues that will drive the stocks and have been pressuring the stocks.

The end of the day was capped off with the news of another $200B of tariffs being announced on Chinese goods which is yet another salvo in the escalating tit for tat trade war. The trade war continues to worsen with no resolution or even hopes of a resolution as it does not appear that there are any effective discussions going on other than the exchange of tariffs.

Our talk about China & Trade
We had a standing room only crowd at Semicon to listen to our discussion and presentation about China, trade, technology & Taiwan. We had a number of discussions with different company managements after our presentation and its clear that nothing about China trade is clear. Everyone is confused and waiting for the next shoe to drop much like the stock market.

One rumor we heard from multiple sources is that some large companies in the industry may have either slowed or put on hold projects in China. To be clear, business is going on as usual but new commitments of significant resources may be questioned given the uncertainty.

Meeting with AMEC …the Chinese semi equipment company
We spent some time with Gerald Yin, the CEO of AMEC, the Chinese semi equipment company. They have had huge success against Veeco the long term leader in MOCVD. They also are competitive in the etch market against Lam, AMAT & TEL etc;. While today they are not a huge force in etch they have made significant in-roads in non-critical etch especially at TSMC and domestic Chinese companies. They are also used in Intel’s China fab.

They estimate that the 20 or so fab project in China could amount to $100B in spend over the next few years.

We think they are the obvious beneficiaries of the near term trade issues between the US and China. While today they are a rounding error as compared to AMAT or LAM that is not likely to remain the case as they have the potential to do to the etch business what they did to MOCVD (maybe to a lesser extent).

We think much of this damage has already been done to the industry and will only get worse if export restrictions are actually put into place.

We would remind investors that export restrictions and licenses for export of semiconductor equipment used to be the norm and were only eased over the last years as trade with China increased. Putting those restrictions back into place would be very easy and just reverting to what had been the case for a longer period of time.

AI is great…so is big data and SSDs etc…
We certainly agree with AMAT about the huge upside potential of AI on the chip and chip equipment industries. We also think that Applied has some potential advantages loosely coupled to AI versus other companies. However, we view it more as a rising tide that will raise all boats. Right now the tide is going out due to the memory slow down and the seas are very choppy due to the China trade war which could tun into a hurricane, so its hard to go out and buy AMAT stock in the face of the near term issues.

We think that AMAT might be well served to broaden out its product line or go “upstream” into the EDA business to get closer to the design source of AI and reap more benefit over the longer term. We think it makes sense for an acquisition or collaboration for AMAT to get closer to chip design.

As previously mentioned we think investors will focus on a near term 10-15% drop quarter over quarter in shipments coupled with Applied’s industry leading China exposure rather than the long term AI upside We will continue to report on Semicon after tomorrow.

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