Menu
Applied served up another winning quarter, that’s good for OLED shares too

Applied served up another winning quarter, that’s good for OLED shares too

 

KEY POINTS FROM THIS ALERT:

  • Our price target on Applied Materials (AMAT) shares remains $70.
  • Our price target on Universal Display (OLED) shares remains $225.

 

Midweek, we saw yet another dynamite earnings report from Tematica Investing Select List company Applied Materials (AMAT).   The company simply walked right over expectations and not only raised its outlook, but also boosted its quarterly dividend and share repurchase program. Simply put, it was a picture-perfect earnings report from top to bottom, and in keeping with increasing presence of our Connected Society investing theme, Applied’s management team shared a number of reasons why as I like to say, “chips are the fabric of our digital lives.”

While many of the talking heads are bemoaning slower growth prospects for the smartphone market, the devices continue to pack more functionality and storage inside their packages, and this is before 5G. Voice recognition technology and greater processing power to handle that as well as augmented reality, virtual reality technologies are leading to greater chip dollar content in these devices despite slower unit growth. Per Applied average semiconductor content per smartphone rose 30% in 2017.  To use the investing lingo, we are seeing rising average dollar content per device that is poised to step up again in 2019-2020 as those aforementioned 5G chips make their way into smartphones as AT&T (T), Verizon (VZ), Sprint (S) and T-Mobile USA (TMUS) all launch 5G commercial networks.

We’re also hearing quite a bit about the growing voice assistant market as Apple (AAPL) launches its Home Pod and Amazon (AMZN) touted 2017 was a banner year for its Alexa powered devices. What’s not really talked about, however, is the typical voice assistant has around 30 chips and a total of 200 square millimeters of silicon, roughly twice the area of a smartphone application processor. Now let’s think about not only the new types of voice assistants we are seeing from Amazon with video screens, but how these digital assistants are being embedded in other devices ranging from TVs to a road map that includes home appliances and autos. All of these digital assistants are connected back to servers like Amazon Web Services and the artificial intelligence workloads require server architectures that have up to eight times more logic and four times more memory content by area than traditional enterprise servers.

The bottom line is the Internet of Things, big data, augmented reality, artificial intelligence, data centers and storage are driving incremental chip demand. This tailwind of our Connected Society investment theme is leading Applied to raise its wafer spending forecast among its customer base to $100 billion over 2018-2019, up from $90 billion in 2017-2018. One of the wild cards for potential upside to that forecast is China, which continues to add domestic capacity, which is benefitting Applied given its leading market share position in the region.

Turning to Applied’s Display business, which is benefitting from larger format TVs as well as the ramp in organic light emitting diode (OLED) display capacity. These drivers have led Applied to forecast more than 30% growth in its Display business in 2018, which follows nearly 60% growth in 2017. Digging into the company’s comments on the earnings conference call, it is not only seeing rising OLED demand, but also a diversification in its customer base which in my view reinforces the

Previously, one customer (most likely Samsung) was more than 50% of its OLED business, and now more than 50% of Applied’s OLED business, but that has flip-flopped and now more than 50% is coming from multiple customers. That widening in demand is not only good for Applied, but it also points to an expanding market for Universal Display’s (OLED) chemical and IP licensing business as well.

On the dividend and share repurchase fronts, Applied Material’s Board of Directors approved a doubling of the quarterly cash dividend on the company’s common stock to $0.20 per share. That new dividend will be payable on June 14, to shareholders of record as of May 24. Ahead of that, Applied will pay its next cash dividend of $0.10 per share on March 14. The Board also approved a new $6.0 billion share repurchase authorization that is in addition to the $2.8 billion remaining under its previously approved authorization. I see these two offering a combination of support for our $70 price target on AMAT shares, while also providing support for the shares. At the current share price, the combined $8.8 billion in repurchasing power equates to roughly 166 million shares, roughly 15% of the company’s overall share count. Do I expect it to happen in one fell swoop? Nope, but it’s a factor that offers a way for the company to continue to meet and potentially beat Wall Street EPS expectations.

Given the consequences a company faces should it miss a dividend payment or find itself in the position to cut it, it’s not a simple decision for a company to boost its dividend, let alone double the existing quarterly payment. In my opinion, that alone says volumes about Applied’s confidence in its business over the coming years, and the additional and upsized buyback program only adds to that.

  • Our price target on Applied Materials (AMAT) shares remains $70.
  • Our price target on Universal Display (OLED) shares remains $225.

 

 

Boosting OLED and AMAT price targets after AMAT’s latest beat and raise quarter

Boosting OLED and AMAT price targets after AMAT’s latest beat and raise quarter

 

KEY POINTS FROM THIS ALERT:

  • Last night Applied Materials (AMAT) delivered another beat and raised its quarterly outlook due to strength across the board in its semi-cap and display equipment businesses.
  • Based on the strength of Applied’s chips and display business, we are once again boosting our price target on AMAT shares, this time to $70 from $65. We continue to rate AMAT shares a Buy at current levels.
  • We are also boosting our Universal Display (OLED) price target to $225 from $200, which keeps our Buy rating intact.

 

After the market close, Applied Materials (AMAT) reported stronger than expected October quarter EPS and raised its outlook for the current quarter relative to consensus expectations. Powering that boosted outlook is the company’s backlog, which now spans $6.03 billion, up 32% year over year, with increases in semiconductor systems, display, and other businesses. Reviewing the company’s results and its drivers — which include the rising demand for chips as our Connected Society and Disruptive Technologies investing themes continue to expand as well as robust demand for organic light emitting diodes displays — we are boosting our price target on AMAT shares to $70 from $65.

In my view, Applied’s CEO summed up what is driving its business rather well on the earnings conference call last night:

“In the annual war for leadership in the smartphone market, handset manufacturers are adding more and more functionality to their devices. IoT applications are expanding rapidly and data generation is exploding. Major inflections are taking place in the data center, and there’s an emerging battle for leadership in high-performance computing and artificial intelligence. And there is huge demand for new display technology, while at the same time, average screen sizes for both TVs and mobile devices are growing considerably.”

  • Based on the strength of Applied’s chips and Display business, we are once again boosting our price target, this time to $70 from $65.
  • We continue to rate AMAT shares a Buy at current levels.

 

 

The October Quarter and AMAT’s Outlook

For the October quarter, Applied delivered EPS of $0.93 excluding non-recurring items on revenue of $3.97 billion, up 41% and 20% year over year, respectively. Sales improvements were had at all three of the company’s business units – Semiconductor Systems (up 14% year over year), Display (up 50% year over year), and Applied Global Services (up 20% year over year). Profit margins rose nicely at the Semiconductor Systems business, but it was the jump in margins at the Display business to 31.8% from 22.8% in the year-ago quarter that led the company’s overall margins to move higher.

On the housekeeping front, during the quarter Applied spent $385 million to repurchase 8 million shares of common stock at an average price of $48.65. Given the health of its business units, Applied should continue to generate ample cash following the $3.6 billion it generated over the last 12 months (roughly 25% of revenue), the company continues to look at returning capital to shareholders. Applied has a track record of boosting its dividend, but on the earnings call, last night shared that as we get clarity on tax policy it will revisit its mix of share repurchases vs. dividend increases. I see that as a rather prudent move, but either way, it means more capital being returned to shareholders, which is not a bad thing at all in my view.

Based on the strength of its markets and its backlog, Applied’s view is it will earn EPS of $0.94-$1.02 on revenue between $4.0-$4.2 billion in the current quarter. That makes the October quarter another “beat and raise” one for the company given current quarter expectations for EPS of $0.91 on $3.97 billion in revenue. I expect AMAT shares will trade up on this news, and with the underlying drivers pointing to a continued upcycle for chips and display, I expect a number of price target hikes to be had in the coming days. Team Tematica will continue to monitor the demand drivers for Applied’s business to determine if the company’s beat and raise track record is likely to continue in 2018. Based on what we’ve seen so far, we are inclined to think that is more likely than not.

 

Boosting our Universal Display Price Target

On the earnings call last night Applied Materials also shared that it now sees demand for its Display business even stronger than it last forecast, which called for 30% growth year over year. What I found more compelling, however, was that based on the investments being made in the display industry today Applied sees roughly half — 50% — of all smartphone screens being organic light emitting diode displays by 2020. That is far stronger than the IHS forecast that called for organic light emitting diode displays to account for 40% of all smartphone screens by 2022.

With the outlook for this display technology expanding more rapidly than expected in smartphones, plus ramping in the use of OLEDs in other markets (TVs, automotive lighting, general illumination), the outlook for Universal’s chemicals and high margin licensing business looks even brighter. This, in turn, has us once again boosting our Universal Display price target to $225 from $200.

  • We are boosting our Universal Display (OLED) price target to $225 from $200, which keeps our Buy rating intact.