Investment Club Presentation · 2019-05-24 · Notre Dame Investment Club Investment Club...
Transcript of Investment Club Presentation · 2019-05-24 · Notre Dame Investment Club Investment Club...
Notre Dame Investment Club
Investment Club Presentation
Company: Applied Materials (AMAT)Analyst: Jason Kidwell
BuyPrice Target: $47.72
Upside: 19.96%
1 2 3 4Historically Cheap Industry Leader in R&D Diversified Product Portfolio Positioned for the Future
Notre Dame Investment Club
5 Year Stock PerformanceCURRENT STOCK PRICE as of 2/2/19: $39.35
Performance in the last five years:
AMAT: +135.01%
SMH: +141.77%
SPY: +55.06%
-50%
0%
50%
100%
150%
200%
250%
300%
2/3/2014 6/3/2014 10/3/2014 2/3/2015 6/3/2015 10/3/2015 2/3/2016 6/3/2016 10/3/2016 2/3/2017 6/3/2017 10/3/2017 2/3/2018 6/3/2018 10/3/2018
AMAT SMH SPY
Worries surrounding memory prices prelude the drop in stock price
Notre Dame Investment Club
Industry Overview
• This industry manufactures equipment used to produce semiconductors and computer chips (ICs)
• Growth opportunities in AI, Big Data, and the Internet of Things
• Constant innovation in the industry rewards those who spend in R&D
Semiconductor Equipment & Machinery Manufacturing Revenue Comparison ($BN)
Industry Competitive Forces
Threat ofNew Entrants:
LOW
Threat of Substitutes:
HIGH
Bargaining Power of Suppliers:MEDIUM
Bargaining Power of Customers:
MEDIUM
• Industry is characterized by rapid technological change.
• Success of firms depends on their ability to innovate
• Capital requirements to install and integrate new equipment
• Long-term relationships with their customers.
• Most customer transactions involve a high level of price negotiation
• Limited buyers and sellers
• Customers have a need to continuously update their products
• In transactions there remains a level of negotiation.
0 5 10 15 20
Applied Materials
ASML Holdin N.V.
Lam Research Corporation
Tokyo Electron
Notre Dame Investment Club
Chip Making Process Overview
Wafer Fabrication
Photolithography Etching
Laying Interconnects
Slicing Wafers Packaging
Silica Sand (base material) is purified into
Silicon Ingot
A layer of photoresist is spread across the wafer
A pattern of hard material is applied to the wafer
Layering and designing interconnect- transistors
connected
Chips on wafer tested-Wafer is sliced into dies
Dies are packaged and assume the familiar form factor of a desktop
processor
= AMAT Point of Production
Notre Dame Investment Club
Semiconductor Industry Value Chain
Semiconductor Equipment and
Machinery Manufacturer
Semiconductor & Circuit Manufacturers
Global Semiconductor & Electrical Product
Manufacturing
Notre Dame Investment Club
Company Overview
• The largest segment of Applied Materials, generating over 60% of the company’s revenue
• Manufacturing of equipment used in fabricating semiconductor chips• Wafers• Patterning equipment• Transistor fabrication
• Provides solutions to optimize equipment, fab performance, and productivity of customers
• No single region accounted for more than 30% of Service revenue for any of the past three years
• Fastest growing segment of AMAT, growing at an average of 39% YOY for the last three years
• Produce equipment used in manufacturing used in LCD and OLED displays
• The largest producer of wafer fabrication equipment (WFE), technology, and services to the semiconductor industry
• Holds more than 21% of market share in the WFE industry
• Has diversified revenue stream in as industry has matured
Applied Materials
Semiconductor Systems Applied Global Services Display and Adjacent Markets
AMAT Revenue Growth ($MM)
02,0004,0006,0008,000
10,00012,00014,00016,00018,00020,000
2013 2014 2015 2016 2017 2018
CAGR= 14.9%
Notre Dame Investment Club
Corporate Governance and Company LeadershipBoard Member Director Since Primary Occupation Independent
Thomas J. Iannotti 2005Chairman of the Board, Former Senior VP and GM of HP ü
Gary E. Dickerson 2013 President and CEO of Applied Materials
Judy Bruner 2016Former Executive VP and CFO of SanDisk Corporation ü
Eric Chen 2015Partner of SB Investment Advisors,former MD of Silver Lake ü
Aart J. de Geus 2007Current Chairman and Co-CEO of Synopsys, Inc. ü
Stephen R. Forrest 2008Head of the OptoelectronicsComponents and Materials Group atthe University of Michigan
ü
Alexander A. Karsner 2008 Managing Partner of Emerson Collective ü
Adrianna C. Ma 2015 Managing Partner at the Fremont Group ü
Scott A. McGregor 2018 Retired President and CEO of Broadcom ü
Dennis D. Powell 2007Retired Executive VP and CFO of CiscoSystems, Inc ü
Name Position Picture Description
Gary E.Dickerson
CEO & President
• More than 30 years of semiconductor experience
• 18 years at KLA-Tencor Corporation serving as president and chief operating officer
Dan Durn CFO
• Joined Applied in 2017 from NXP semiconductors where he was executive VP and CFO
• Previously served as a VP of technology IB at Goldman
Jay Kerley CIO
• Joined Applied Materials, Inc. in 2006
• Has more than 25 years of industry experience
Notre Dame Investment Club
Historically Cheap
• Bill Kennedy, Fidelity Research, Worldwide Fund: Portfolio Manager
• “Price to Sales actually looks quite cheap”
• “Every cycle gives higher highs and higher lows in operating income”
0x
1x
2x
3x
4x
5x
$0$10$20$30$40$50$60
2/28/2009
2/28/2010
2/28/2011
2/29/2012
2/28/2013
2/28/2014
2/28/2015
2/29/2016
2/28/2017
2/28/2018
Share Pr ice Price to Sales
• Market is too focused on the short term and is forgetting the big picture
• The time to buy is when the price is cyclically depressed
• Earnings are higher than they’ve ever been
Comparison of Stock Price and Price/Sales RatioPrimary Research
0x2x4x6x8x
10x12x14x16x18x20x
2/12/2014 2/12/2015 2/12/2016 2/12/2017 2/12/2018 2/12/2019
Historical EV/EBITDA RatioWhy Buy Now?
1
Notre Dame Investment Club
Importance of R&D
• Major innovations in the industry require large R&D expenditures by semiconductor companies
• As Moore’s Law slows, companies will have to innovate better ways to package computer chips
• Building the META Center, a new R&D center in New York
2,019
1,190
1,804
884
0
500
1,000
1,500
2,000
2,500
2013 2014 2015 2016 2017 2018
AMAT Lam Research ASML Tokyo Electron
• Increased demand means increased production for AMAT, the market leader in WFE
• Driven by the generation of 5G smartphones, server growth, and cloud growth
• In 2019, the industry should still match 2017, a previous all-time high
R&D Expense Comparison ($MM)
Projected WFE Industry Market Size ($BN)
Forward Looking Spending
What Wafer Fab Growth Means
2
0
10
20
30
40
50
60
70
2016 2017 2018 2019* 2020* 2021* 2022* 2023* 2024* 2025*
CAGR= 5.7%
Notre Dame Investment Club
Broad Product Portfolio
• Semiconductor Systems makes up just over 60% of AMAT’s revenue
• Display and Service segments growing
• Within Semiconductor Systems, revenue is diversified
0
5,000
10,000
15,000
20,000
2015 2016 2017 2018
Semiconductor Systems Applied Global Services
Display and Adjacent Markets Corporate and Other
24%
27%
36%
13%
Foundry
Dynamic random-accessmemory (DRAM)
Flash memory
Logic and other
Semiconductor Systems Revenue BreakdownPercent of Revenue from Semiconductor Systems
Revenue by Segment ($MM)A Broadening Product Portfolio
63%
100%
70%
93%
0%10%20%30%40%50%60%70%80%90%
100%
AMAT Lam ASML (2017) Tokyo Electron
3
Notre Dame Investment Club
Trend towards AI, Big Data, and IoT
• Artificial Intelligence: The theory and development of computer systems able to perform tasks that normally require human intelligence
• Big Data: The use of extremely large data sets analyzed computationally to reveal patterns, trends, and associations
• Internet of Things: The interconnection of computing devices in everyday objects, enabling them to send and receive data
3,222 4,819 7,345 11,28417,268
25,99637,987
53,231
70,972
89,847
0
20,000
40,000
60,000
80,000
100,000
120,000
2016 2017 2018 2019* 2020* 2021* 2022* 2023* 2024* 2025*
• Use of AI and Big Data to revolutionize medical treatment
• Use of IoT devices by natural gas companies to monitor leaks
• Using Big Data to make shopping more convenient and advertising more effective
• Building the META Center in NY specifically focused on innovating for the AI-Big Data era
• Industry leaders in cobalt products and tools used in photolithography and etching processes in chip making
• Direct contact with customers in the industry
Broadening Product Portfolio Projected AI Industry Market Size ($MM)
Applications in the Real World How Applied Fits
4
Notre Dame Investment Club
9%
30%
21%16%
14%
6%
5%United States
China
Korea
Taiwan
Japan
Europe
Southeast Asia
Headwinds
• Uncertainty in Asian markets is the biggest headwind at the moment• Import restrictions from China extremely unlikely
• AMAT memory customers have taken a more cautious approach to capital expenditure as they take a wait-and-see approach
• Decreased spending by memory customers
• Development of Extreme Ultraviolet Technology (EUV)
• Chinese customer (JHICC) currently banned from receiving US exports
1,3741,731
1,379 1,5982,159
4,9984,530
-1,000
0
1,000
2,000
3,000
4,000
5,000
6,000
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019* 2020*
Location of Customer Facilities in 2018Uncertainty in Asian Markets
AMAT’s Operating Income Cycle ($MM)Further Risk Factors
Notre Dame Investment Club
Solutions and Tailwinds
• With the slowing of Moore’s Law, demand for memory equipment now has a floor
• The slowdown in miniaturization has led companies to invest in facilities, setting up future demand growth
• Offers better picture quality and image contrast than traditional LCD or LED screens
• Applied is developing equipment used in all OLED screens and for flexible substrates
• Companies using OLED include Apple, Samsung, and Sony
Projection of OLED Industry Market ($BN)
Number Manufacturer Segment1 China Foundry2 China Memory (DRAM)3 China Memory (NAND)4 GlobalFoundries Foundry5 Intel Logic6 Intel Memory (NAND)7 Micron Memory (NAND)8 Micron Memory (DRAM)9 Samsung Foundry/Logic10 Samsung Memory (DRAM)11 Samsung Memory (NAND)12 SK Hynix Memory (NAND)13 SK Hynix Memory (DRAM)14 SMIC Foundry15 Toshiba/WDC Memory (NAND)16 TSMC Foundry17 UMC Foundry
Memory Demand Floor Set Semiconductor Fab Projects in 2018 & 2019
Growth in OLED
17
2326
3033
3740
44
05
101520253035404550
2016 2017 2018 2019* 2020* 2021* 2022* 2023*
CAGR= 4.9%
Notre Dame Investment Club
Final Recommendation
Downside Case
Price Target: $38.36 Downside: -3.57%
Base Case
Price Target: $47.72Upside: 19.96%
Upside Case
Price Target: $53.20Upside: 33.74%
Applied Materials is trading at historically cheap values because the market is not thinking of the company’s long term opportunities. Therefore, I am recommending Applied Materials (AMAT) as a buy with a 19.96% upside at this point in time.
Recommendation
Share Price as of Feb. 10, 2019: $39.78
Notre Dame Investment Club
Notre Dame Investment Club
Appendix
Notre Dame Investment Club
Valuation - Comparable Companies Analysis
Notre Dame Investment Club
Valuation - WACC
Notre Dame Investment Club
Valuation – DCF(Base)
Notre Dame Investment Club
Valuation – DCF(Base)
Notre Dame Investment Club
Valuation – DCF(Upside)
Notre Dame Investment Club
Valuation – DCF(Upside)
Notre Dame Investment Club
Valuation – DCF(Downside)
Notre Dame Investment Club
Valuation – DCF(Downside)