Company Overview: Based in California, Applied Materials, Inc.(NASDAQ: AMAT) is one of the top providers in materials engineering solutions to produce new chip and advanced display across the globe. The company is also engaged in providing implementation and support services associated with the equipment supplied. The company was founded in 1967 and made its first public offering in 1974. The company has more than 22,000 employees across 18 countries.
 

AMAT Details
 

 
AMAT Rides of Higher Investment and Geographic Expansion: Applied Materials, Inc. (NASDAQ: AMAT) is one of the top suppliers of equipment for the manufacture of semiconductor, solar photovoltaic (PV) cells, flat panel liquid crystal displays (LCDs), and modules all around the world. The company has three reporting business units namely, Semiconductor Systems unit, Applied Global Services and Display & Adjacent Markets. The company’s Semiconductor segment provides equipment for front-end operations in the silicon manufacturing process. The company has more than 33,000 systems installed, and its Applied Global Services segment goes a long way to safeguard customer satisfaction and support.
 
In FY19, revenues from Semiconductor Systems segment accounted for ~62% of total revenues, whereas revenues from Applied Global Services and Display and Adjacent Markets accounted for 26% and 12%, respectively. Despite the challenging market condition due to down cycles in both semiconductor and display equipment spending, the company managed to deliver robust FY19 financial results. Further, in each quarter of FY19, the company reported higher EPS as compared to FY2013. These implementation and efforts indicate the expansion and diversification of semiconductor demand drivers bridging the gap between consumer and enterprise applications. 
 
In addition, the company also achieved record financial results in its services business and continued to increase the number of installed-base systems included by subscription-like service agreements. The company also remained on track to implement cost-cutting measures and invest higher in R&D for new products and capabilities. The company is well-positioned to accelerate its customers’ technology roadmaps and to take advantage of the enormous opportunities ahead.
 
Over the period of FY15-FY19, the company has reported revenue CAGR of 10.9%. Revenue, over the same period, demonstrated an upward movement on the back of a strong market position and geographical expansion. Net income over the same period witnessed a CAGR of 18.4%.
 

5 Years Financial Data (Source: Company Reports)
 
Going forward, the company remains committed to building a better future, by increasing its portfolio strength, growing investments in the new playbook, expanding position in memory and expanding new design wins. Moreover, the rollout of 5G mobile technology worldwide has led to higher demand for semiconductor equipment, which is expected to be a tailwind for the company, in the near future. Also, the company is likely to ride on the continued expansion of the big data age, artificial intelligence, and other new computing technologies. Moreover, growth impetus in new nodes ramp across foundry, logic, NAND, and DRAM is likely to aid AMAT, going forward. 
 
2QFY20 Key Highlights for the Period Ended April 26, 2020: During the quarter, the company reported non-GAAP earnings of 89 cents per share, which increased 27% from the prior corresponding figure of 70 cents per share. Net sales during the period stood at $3,957 million, up ~12% from the prior corresponding $3,539 million. The company witnessed robust impetus from key geographies, namely Korea, Taiwan, and China. Despite, soft demand due to COVID-19 led crisis, the demand for equipment and services continued to be strong. During the quarter, non-GAAP gross margin expanded 110 basis points (bps) year over year and came in at 44.6%. Operating expenses on the other hand increased 8.4% and stood at $817 million. In 2QFY20, non-GAAP operating margin increased 230 bps to 24.7%.
 

 
Segmental Details: During the quarter, the company’s Semiconductor Systems Group generated $2,567 million sales and accounted for ~65% of net sales, indicating a rise of 17.5% from the prior corresponding period. Revenues from Applied Global Services segment came in at $1,018 million, which increased from $984 million reported in the year-ago period and accounted for ~26% of total revenues. Notably, during the quarter, total semi-installed based business soared ~38% of semi-related revenues. Display and Adjacent Markets revenues for the quarter stood at $365 million, up from $348 million reported in the year-ago period and accounted for the remaining 9% of net sales.
 

Segment-wise Highlight (Source: Company Report)
 
Geographical Highlights: During the quarter, sales from United States, Europe, Japan, Korea, Taiwan, Southeast Asia, and China came in at $331 million, $181 million, $467 million, $753 million, $1,029 million, $58 million and $1,138 million, respectively. These countries contributed 8%, 5%, 12%, 19%, 26%, 1% and 29% of total revenues in 2QFY20, respectively. The company witnessed a sales increase in Korea, Taiwan and China, on a year over year basis, which grew 70.7%, 36.5% and 14.6%, respectively.
 

Revenues by Geography (Source: Company Report)
 
Balance Sheet & Cash Flow Highlight: The company exited second-quarter with cash and cash equivalent of $5,281 million compared with $3,424 million at the end previous quarter. Inventories at the end of the period stood at $3,725 million versus $3,474 million in the previous quarter. Total debt (short and long) at the end of the second quarter FY20 amounted to $6,815 million, as compared to $5,314 million at the end of the previous quarter. The company returned $199 million through stock repurchases and $193 million through cash dividends to its shareholders. Cash flow from operations during the quarter came in at $635 million, and cash from investing activities stood at $165 million.
 

Liquidity Position (Source: Company Report)
 
COVID-19 Impact: Due to the rising uncertainty surrounding the impact of coronavirus on the business, the company has withdrawn the guidance of its June Quarter. The global supply chain and logistics disruption across the industry compelled the company to suspend its forthcoming outlook. However, the company remains well-positioned to curtail these hindrances with robust customer relationships along with enhanced financial strength and technology know-how.
 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 35.47% of the total shareholding. The Vanguard Group, Inc. and T. Rowe Price Associates, Inc. hold the maximum interests in the company at 8.22% and 5.57%, respectively.
 

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
 
Key Metrics: During Apr’20, the company reported a gross margin of 44.2%, which is higher than the year-ago figure of 43.2%. EBITDA margin for the same time period stood at 27.1%, higher than the industry median of 18.2% and pcp margin of 25%. Net margin stood at 19.1%, higher than the industry median of 7.2%. The above margins seem well-aligned with the company’s objective to improve overall profitability by attaining a higher rate of growth in revenue than costs. ROE stood at 8.5% as compared to the industry median of 2.3%.
 

Key Metrics (Source: Refinitiv, Thomson Reuters)
 
Risk Analysis: On the flip side, the company faces customer concentration risk as the top 10 companies contributed more than 10% of AMAT’s total sales for fiscal 2019, 2018 and 2017. These companies are Samsung, Taiwan Semiconductor, and Intel Corporation. The loss of any customer may reduce orders, consequently impacting revenues and operating results. Further, the company's revenue growth in recent quarters has been mainly inclined towards its international operations. Hence, there are risks relating to foreign operations that are required to be addressed time to time. The company also faces stiff competition from other large equipment makers, such as KLAC and LRCX.
 
Outlook: The company did not provide any outlook for 3QFY20 due to manufacturing and supply-chain disruptions due to COVID-19 led outbreak. The company opines that demand for foundry logic is likely to remain resilient in the near term, on the heels of ever-increasing need for specialty nodes in automotive, power, 5G rollout, IoT, communications and image sensor markets. Moreover, the continuing inventory correction in DRAM is a key positive, going forward. The company remains positive that more customers will upgrade their kit, following the 5G rollout, which, in turn, will aid the company’s top-line growth. In addition, the company’s R&D activities, and innovative next-generation products are likely to aid the Display and Adjacent Markets segment, in the days ahead.
 

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
 
Valuation Methodologies:
 
Method 1: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Method 2: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)
 
Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
 
Stock Recommendation: The stock of AMAT closed at $56.4 with a market capitalization of ~$51.69 billion. The stock made a 52-week low and high of $36.64 and $69.44, respectively. The stock of the company went down by 7.81% in the past three months but run up ~6.57% in the last one-month period. While the company could not predict the anticipated impact of COVID-19 on financial performance, it is optimistic about maintaining its financial well-being even in the light of the pandemic. Moreover, the company’s ongoing operations across China remains a key positive. Considering the robust results for 2QFY20, resilience of the business, modest industry outlook and growth prospects, we have valued the stock using P/E and P/CF multiples based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in % terms). For the purpose, we have taken peers like Lam Research Corp (NASDAQ: LRCX), KLA Corp (NASDAQ: KLAC), Micron Technology Inc (NASDAQ: MU), to name few. Hence, we recommend a “Buy” rating on the stock at the closing price of $56.4, up 2.29% on 27 May 2020.
 

AMAT Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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