Applied Materials Eyes Strong Growth; Raise FVE to $131

Wide-moat Applied Materials AMAT reported fiscal third-quarter results above management’s guidance, while guiding fiscal fourth-quarter revenue above our expectations. We note Applied and its peers have all called for strong growth in 2021, driven by record capital expenditure levels at TSMC and Intel as well as solid memory spending. Management expects Applied’s fourth-quarter revenue to be up 34% year over year at the midpoint, with momentum persisting into 2022. Consequently, we are raising our fair value estimate to $131 per share from $125. Shares look fairly valued at current levels.

Third-quarter sales rose 41% year over year to $6.2 billion, led by a 53% increase in the semiconductor systems group, or SSG, revenue. Within SSG, equipment sales to logic and foundry customers grew 75% year over year. We attribute this strength to investments supporting leading-edge process technologies at the likes of TSMC as well as lagging-edge processes that support end markets such as automotive and Internet of Things. Memory equipment sales also grew 26% year over year. We expect foundry and logic to be the biggest growth drivers for Applied’s SSG sales in 2021.

Quarterly services revenue was nearly $1.3 billion and was up 24% year over year. In recent years, services and part sales from long-term service agreements have grown from 40% to 87% of total service revenue. We view this recurring revenue as sticky and resilient, which should help Applied and its peers mitigate the volatility in the equipment market. Gross margins rose 40 basis points sequentially to 47.9% thanks to a more favorable SSG mix.

Management expects fourth-quarter sales to be $6.3 billion at the midpoint, with SSG at $4.6 billion, services at $1.3 billion, and display at $400 million. We think the firm is poised to maintain a solid growth trajectory into 2022.

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