Applied Materials (AMAT) dominates the SME (semiconductor manufacturing equipment) market with an average share of 14% to 16%, according to Trefis. The company supplies a wide range of materials engineering solutions that are used to manufacture almost all semiconductors and advanced displays. It has divided its business into three major segments: Semiconductor Systems, Display, and AGS (Applied Global Services).
The company earns more than 60% of its revenue from the Semiconductor Systems division, catering to a varied customer base of foundries, memory chip, and logic. It’s the company’s most profitable division, and its earnings are directly proportional to semiconductor companies’ capital spending.
Over the past two quarters, Semiconductor Systems’ segment received new orders of more than $4 billion. In these two quarters alone, there was a vast shift in demand. In fiscal 2Q16, 49% of new orders came from the Flash memory market as Samsung (SSNLF), Intel (INTC), and Micron (MU) transition to 3D-NAND. In fiscal 3Q16, 57% of new orders came from foundries, as Samsung and TSMC (TSM) transition to 10-nm (nanometer) and 7-nm nodes.
For fiscal 4Q16, AMAT expects its Silicon Systems revenue to grow 45% YoY (year-over-year) to $2.1 billion on the back of a total order book of $4.6 billion. This growth would largely be driven by NAND and Foundry markets. As seen from the above graph, these two products have increased AMAT’s total addressable market in wafer equipment from 53.5% in 2012 to more than 63% in 2016.
Over the past five years, AMAT’s product mix has shifted from logic to memory. In memory, the mix has shifted from DRAM (dynamic random access memory) to NAND. This shift came as the demand for smartphones increased.
NAND demand is expected to grow further, as IoT (Internet of Things), virtual reality, and autonomous car trends could cause a data explosion and thus boost demand for memory. Moreover, these trends would require high-performance GPUs (graphic processing units) and microprocessors to analyze this data and put it to use. All this would make NAND and foundries key growth drivers for AMAT’s Semiconductor Systems division.