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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.
Once again, the herd catches up on Universal Display (OLED) shares

Once again, the herd catches up on Universal Display (OLED) shares

After languishing for several weeks, shares of Disruptive Technology company Universal Display (OLED) shares over the last two days popped $16, or more than 14%, to finish close last night at $127.10. The catalyst for the move was Deutsche Bank initiated coverage on the company with a Buy rating and a price target of $135, in line with our own.

While we like the herd catching up to our way of thinking, the surge in the shares comes with less than two weeks until Apple’s (AAPL) next iPhone event on September 12. We suspect over the next two weeks the iPhone rumor mill will be once again cranking up, with much chin wagging over the number of models, form factors and how many models will be employing an organic light emitting diode display. This likely means that at least in the short term, OLED shares are likely to melt higher, but as we’ve seen many, many times the devil is in the details when it comes to Apple’s new products. That means expectations in the near-term could get ahead of themselves, and we note this with 6% upside to our $135 target.


Make no mistake, we continue to see a bright future ahead for Universal Display and its organic light emitting diode chemicals and IP business over the coming quarters as the number of applications climbs alongside increasing screen sizes for smartphones and TVs. This has us long-term bullish on the shares, and while it’s likely that we might have to raise our price target on OLED shares again before the end of 2017, the risk we run in the very short-term is the shares are ahead of themselves at least temporarily.

Could this result in a “buy the rumor, sell the news” set up given Apple’s upcoming event? It’s possible, but given the medium- to longer-term growth prospects, we would see that as an opportunity for those that have missed out on scooping the shares thus far. As we’ve shared in the last few weeks, the $110-$115 share price band makes for a compelling proposition on risk-to-reward trade-off for patient investors. As new data becomes available, we’ll incorporate it into our thinking, including our price target.

  • At current levels, subscribers should “Hold” Universal Display (OLED) shares rather than commit fresh capital.
  • Our price target remains $135, but given expanding market applications for its products and licensing business, we’re inclined to be owners of the shares for the medium to longer term.

YouTube’s  ‘breaking news’ addition further complicates things for broadcast TV

 

Whether it’s on the go, at work or at home, streaming content continues to account for a growing portion of consumer content consumption. It’s, therefore, no surprise that Apple (AAPL), Facebook (FB) and others are looking to join Netflix (NFLX) and Amazon (AMZN) in delivering proprietary content. On the flip side, Disney (DIS) is angling to bring its content directly to consumers rather than through Netflix or broadcast mechanisms.

We see these moves signaling more competition ahead that will force companies to up the ante. Already Amazon and Facebook are looking to bring live sporting events to consumers, and now Google’s YouTube is planning on adding a streaming news section for users to digest “Breaking News.”  This adds to its growing deployment of YouTube TV and raises more questions as to the speed of the demise of broadcasted content. As we see it, the intersection of our Connected Society and Content is King investing themes are poised to deliver more creative destruction that will radically alter the existing playing field much the way the internet skewered the newspaper industry.

YouTube has started rolling out a “Breaking News” section in people’s feeds today across platforms as Alphabet continues to tailor custom content playlists to users logged into Google Accounts, Android Police reports.For most, YouTube is a place to hop from one video to the next and descend down rabbit holes, but browsing anything like a feed has become less straightforward than other platforms, which makes the breaking news section an interesting addition.

As the video sharing site has grown older, the content has grown more produced with YouTube personalities mounting “celebrity” careers, while commentary-heavy videos grow in popularity over the raw video that is more common on Facebook and Twitter.For YouTube’s part this has grown to be a very valuable distinction.

While Facebook’s has seen its video views increase heavily by way of quick-and-dirty videos, YouTube seems to be somewhere where people invest major time browsing, even if there seems to be just as much noise. In June, YouTube CEO Susan Wojcicki announced that the site had 1.5 billion watching an hour of video each on mobile alone.

Source: YouTube starts delivering ‘breaking news’ on its homepage across platforms – TechCrunch

Verizon to join AT&T, Comcast and others with its streaming TV service

Verizon to join AT&T, Comcast and others with its streaming TV service

Following in the footsteps of HBO, AT&T, and Comcast, it’s looking like Verizon wants to appeal to the watch what I want, when I want, where I want Connected Society viewer. More competition should serve to improve choice, price and programming choices, and hopefully lower cable bills as well. The question is what does this mean for Hulu?

AT&T will soon have competition for its DirecTV Now service, according to a Bloomberg report, which says that Verizon is preparing to launch its own service in the summer. Verizon Communication…

Verizon Communications Inc. has been securing streaming rights from television network owners in preparation for the nationwide launch of a live online TV service, according to people familiar with the matter. The telecommunications giant plans to start selling a package with dozens of channels this summer.

Source: Verizon launching its own streaming TV service in the summer as net neutrality under threat | 9to5Mac

Barron’s Gets Behind our OLED, AMAT and DIS Positions

Barron’s Gets Behind our OLED, AMAT and DIS Positions

Over the weekend, among its many articles Barron’s published two pertaining to several positions on the Tematica Select List — Disruptive Technology plays Universal Display (OLED), Applied Materials (AMAT) and Content is King company Disney (DIS). In our view, each of these articles is bullish for the corresponding shares, but even so let’s review:

In “Corning, Samsung: China’s OLED Spend May Be Big Trouble in 2018, Says Bernstein”  following conversation with 23 companies and industry experts, investment firm Bernstein share their view that, “China is a big force in a rise in spending for display technologies, particularly, OLED, which is taking over from LCD, and also for spending on semiconductors, with the move to so-called 3-D NAND chips.”  The authors of the report go on to say:

“OLED capacity ramp-ups from the Chinese players are even more aggressive than we thought, and hence equipment and material players are benefiting from this ‘OLED capex cycle’. On the semiconductor equipment side, we are seeing a similar story – rising capex for 3D NAND coming from China will translate into good demand for semi equipment makers. Finally, for memory, DRAM supply is tight for now, so read-through is positive for DRAM pricing through 2017.”

We certainly see this rather positive and confirming for our investment thesis on Universal Display and Applied Materials. While many have and will likely continue to focus on Apple (AAPL) and its next iPhone iteration, we see a larger shift going on, much like the one we saw more than a decade ago when light emitting diode (LED) technology exploded. As LED applications expanded from mobile phones and backlighting for LCD TVs to automotive lighting, Cree (CREE) shares took off, which was very positive for our readers at the time since we had a Buy rating on the shares at the time. This time around, we see the same happening for Universal Display shares, especially since we see Universal’s business benefitting from its intellectual property licensing business. In our view that makes the company more like Qualcomm (QCOM) than Cree.

Turning to the second article, “Disney’s Iger On Movies, Parks, ESPN” the author hits a number of points that power our investment thesis — an improving movie slate and recent park price increases that should drive revenue higher this year. The article also bangs a familiar drum that is ESPN, which continues to hemorrhage customers as more and more cut the cord, but it also mentions that Disney is expected to launch its own over the top ESPN service later this year as well as ESPN landing on other over the top services like our own AT&T’s (T) DirectTV NOW. As we recently shared, Disney is also focusing on cost control inside ESPN, including laying off TV, radio, and online personalities as part of a plan to “trim $100 million from the 2016 budget and $250 million in 2017.”

Getting back to Disney’s film business, its latest release, live-action “Beauty and the Beast” delivered a record-setting weekend box office opening with $170 million. Not only was this a record-setting March opening weekend, but the seventh largest domestic opening of all-time. Internationally, “Beauty and the Beast” delivered an estimated $180 million in ticket sales from 44 material markets for an estimated $350 million global opening, making it the #14 on the all-time best list. We can already see the Disney merchandise flying off the shelves now and later this year when the DVD and video on demand releases hit just in time for year-end holiday shopping. Much the way Disney is adding Frozen and Star Wars franchise attractions to its park, we would not be surprised to see a Beauty and the Beast addition as well.

  • We continue to rate Universal Display (OLED) shares a Buy with a $100 price target.
  • Our rating on Applied Materials (AMAT) remains a Buy with a $47 price target. 
  • We continue to rate Disney (DIS) shares a Buy with a $125 price target.
Atari Banks Its Gaming Content On a  Television Future

Atari Banks Its Gaming Content On a  Television Future

While today’s teens and Millennials have enjoyed rich graphics and plotlines in their gaming experience, those of us that grew up with Missile Command, Asteroids, Centipede, Defender and many other classics fondly recall our Atari gaming system. Was it simple by today’s standards, absolutely, but we still spent hours saving the world or defending the galaxy. Now Hasbro, which acquired Atari in 1998, recognizes that Content is King, and is aiming to bring its gaming content to TV as well as the box office.

 

Atari has announced plans for a multi-pronged television strategy, reports Variety. The gaming company, which is best known for its late 1970s and early 1980s games and consoles, has several new television series in development, including a game show.Game On is an unscripted reality-style game show Atari in which contestants navigate through life-sized sets based on games from Atari’s library. Atari has also partnered with Discover on a TV series based on its 1978 game Codebreaker.

Source: Atari Aims For Television Future