Will Experts Be Watching Applied Materials for Insight on Apple?

Like an Olympic event, one of the more important technology earnings events of the quarter is just moments away and you want to tune in for this one. Applied Materials Inc. (AMAT.OQ) is expected to report earnings after the market close on Aug. 18 and there are several reasons you want to pay attention to their report, including insight into what to expect from Apple Inc. (AAPL.OQ) and Samsung Electronics Co. Ltd. (005930.KS).

Will the momentum continue?

Semiconductor capital equipment companies have seen large gains since the start of the year, with Applied Materials shares up 47.8% YTD, outperforming the benchmark indices along with its peers. As the largest non-lithography semiconductor capital equipment company, with a market cap of $29.72 billion, along with a presence in nearly every major process of computer chip manufacturing, AMAT is the company to watch for insight on whether or not the momentum can continue.

Exhibit 1: Peer Comparison of CAM Component Scores

Source: I/B/E/S data

Top scoring company

Our Combined Alpha Model (CAM) ranks companies on a scale from 1 to 100, with 100 being the highest, utilizing a combination of value, momentum, ownership, and quality model component analytics. AMAT’s score of 91 places it the top decile of North American companies.

Applied’s score of 99 on our Price Momentum (Price-Mo) model signals that this darling of the industry’s stock price has momentum on its side and may continue on its upward trajectory. This is a good sign for the industry.

Crowd favorite

If this were an Olympic event, Applied would be favored. Our StarMine Analyst Revisions Model (ARM) measures analyst sentiment and ranks companies by a score of 1 to 100, with 100 being the highest. AMAT’s ARM score of 91 places them in the top decile of North American companies.

Exhibit 2: AMAT – StarMine Analyst Revisions Model (ARM) Scores vs. Share Price

Source: I/B/E/S data

The bullish sentiment is reflected by several upward revisions to analyst estimates. AMAT is now expected to report revenue of $2,539 million, up 11.8% from the previous year, along with earnings per share of $0.48 per share, up 45.5% from the prior year.

What to Watch

Now we can get into the fun part, because there is a lot to look for in Applied’s earnings conference call. The bullish sentiment from both analysts and investors is a reflection of several factors.

Applied Materials has one of the best management teams in the business. It has an outstanding history of strategic execution of market expansion when there are major changes in technology along with a strong track record of improving quality of earnings, inventory turnover, and cash generation.

Additionally, the blocked merger of AMAT with Tokyo Electron Ltd. (8035.T) is behind them, so this is the first time we get to see this management team fully engaged as the leaders of Applied Materials. You can read more about their history in one of my previous articles here.  Having this behind them also puts Applied at an advantage over two of its top competitors — Lam Research Corp. (LRCX.OQ) and KLA-Tencor Corp. (KLAC.OQ), which were expected to merge by October, but have recently run into delays.

There is a major technology shift taking place as memory manufacturers move to 3D NAND technology from 2D NAND. The short way to summarize the significance of 3D NAND is that essentially it solves the problem of trying to compress everything into a smaller flat or planer space by building vertically.

Creating more planer room has several benefits such as size, power, reliability, and latency. Longer-term, once they reach 128 layers, it also becomes cheaper than 2D. It’s important to note that 3D NAND also has the benefit of allowing the most expensive lithography equipment to be used longer. Applied is well positioned to be the major benefactor of this shift to 3D NAND.

Now the big one you’ve been waiting for: OLED displays. If you haven’t noticed, Samsung’s new Galaxy and Note 7’s have been a huge success. A big part of this is due to the OLED displays, which use AMAT’s equipment. Some of the critical features this allows for are the curved glass, waterproofing, resolution, and differences in backlighting. However, one of the biggest advantages is that it lends itself to virtual reality. Without OLED, the VR experience deteriorates, and can even make the user sick. Given that Apple doesn’t like to come into a market without an excellent user experience, and that they don’t have OLED screens, their absence from the VR market isn’t a surprise.

Rumor has it that large orders for Applied’s OLED display equipment to China are to produce mobile phone screens for Apple. Therefore, given the headline positions recently taken in Apple, you can bet the whales are watching AMAT’s earnings call for any indications on what to expect from Apple.