Since its inception in the late 1960s, Applied Materials has emerged as a global leader in semiconductor equipment manufacturing. Applied Materials was added to Sifter Fund’s portfolio in 2022. This California-based company plays a pivotal role in producing essential machinery for chip manufacturing, making it a cornerstone of modern technology.
Applied Materials is central to the technology we use daily. They manufacture the machines critical for producing computer chips, placing them at the heart of the semiconductor industry.
Do you want to dive deeper to Applied Materials? Sifter’s Portfolio Manager Alexander Järf produced a 50-page report discussing the company’s earnings model, competitive situation, and future growth prospects. Download the research note.
Applied Materials’ is a niche market leader in deposition equipment seqment
Applied Materials operates in a niche market within the capital machinery business, which is crucial for chip manufacturing.
The business is divided into several segments, with lithography equipment being prominent.
Applied Materials’ most significant and defining role is in the deposition equipment segment, where it is the largest player. This segment represents a substantial part of their business, demonstrating their specialization and dominance in a specific, high-value area of chip production.
Applied Materials provides critical products and services to it’s customers
One of the Sifter Fund’s key criteria for quality stock selection is that a company’s products or services are not only critical to its customers but also bring substantial benefits such as enhanced efficiency, reliability, and indispensable value in their operations.
This approach ensures that we invest in businesses whose offerings are integral to their clients’ success, fostering long-term customer loyalty and sustainable business growth.
Applied Materials’ services are critical to their customers for several key reasons:
- Machine Downtime Impact: The machinery supplied by Applied Materials is essential for chip manufacturing. If these machines experience downtime or technical issues, it can lead to significant losses. A single day of downtime in a factory can cost millions of dollars in lost revenue. This high-stakes environment underscores the importance of reliable and efficient service support.
- On-Site Service and Rapid Response: Applied Materials provides a service model that includes having a service desk directly at the customer’s factory. This allows them to address and fix issues almost immediately. The ability to provide on-site, rapid response service is crucial in minimizing downtime and ensuring continuous production for their customers.
- Revenue Model and Customer Support: About 30% of Applied Materials’ revenue comes from its service sector. This indicates the substantial role that service and support play in their business model. More importantly, it reflects the value their customers place on having reliable, immediate service support as part of their operations.
- Long-Term Relationship and Trust: The need for such immediate and effective service has likely contributed to the long-term relationships and trust that Applied Materials has built with its customers. This service reliability is a key aspect of their competitive advantage, ensuring customer loyalty and satisfaction.
Applied Materials’ Competitive Advantages
Applied Materials’ competitive advantage in the challenging semiconductor industry is significantly bolstered by its substantial commitment to research and development (R&D) and the cumulative learning it has amassed over the years.
Decades of Cumulative Learning
Applied Materials boasts six decades of cumulative learning and technological advancement. This extensive experience is a vital asset in the semiconductor industry, which is characterized by rapid technological changes and complex manufacturing processes.
The depth and breadth of knowledge gained over such a long period give Applied Materials a unique edge in understanding and anticipating industry trends, technological challenges, and customer needs.
Significant R&D Expenditures
Applied Materials invests heavily in R&D, spending between two and three billion dollars annually. This represents approximately 10 to 15% of their sales and has been a consistent trend over time.
Such substantial investment in R&D is crucial for maintaining and enhancing their competitive position in a sector where technological leadership is key.
By continuously innovating and improving their product offerings, Applied Materials can offer advanced solutions that meet the evolving demands of the semiconductor industry.
Navigating a Cyclical and Competitive Industry
The semiconductor industry is known for its cyclical nature, with periods of high growth followed by slowdowns.
Despite this volatility, Applied Materials has maintained a strong position, indicating limited competition in its specific segment.
The company’s sustained investment in R&D and the accumulated expertise over the years enable it to navigate these cycles effectively, providing stability and reliability to its customers.
The historical financial performance of Applied Materials reveals a strong and positive trend
Applied Materials has experienced a remarkable increase in sales, roughly tripling them over the years. This substantial growth in revenue is a clear indicator of the high demand for the company’s equipment.
Such a performance not only reflects the company’s ability to expand its market reach but also suggests strong industry growth and the increasing reliance on semiconductor technology.
Alongside revenue growth, Applied Materials has also reported impressive profit figures. This profitability is indicative of the company’s operational efficiency, pricing power, and the value of its products in the semiconductor industry.
The company’s historical financial performance suggests that it enjoys a strong position within its market segment. Despite not being a monopoly, its dominance in certain subsectors and the ability to consistently grow revenue and profits point to a competitive advantage in the industry.
Why we invested in Applied Materials?
Our investment in Applied Materials is a aligned with our quality investing strategy. We focus on companies with strong market positions, robust business models with a consistent demand for their critical products.
One of the primary reasons we invested in Applied Materials is the enduring demand for their semiconductor manufacturing equipment.
This demand is remarkably largely unaffected by the geographical location of chip production. In our assessment, the indispensability of their machinery in the semiconductor manufacturing process ensures a continuous market for Applied Materials’ products.
A key aspect of Applied Materials’ business that we find particularly compelling is its global market reach and independence. Regardless of where semiconductor manufacturing occurs, there is a need for the equipment that Applied Materials provides. This aspect of their business model significantly mitigates geographical risks and contributes to the stability of their market demand.
Future Prospects: Growth and Challenges
We project that Applied Materials will experience an average growth of approximately 10% per year over the long term. This growth expectation is underpinned by the increasing global demand for data processing and the consequent need for more advanced semiconductor technology.
The exponential increase in data generation is a key driver for this anticipated growth.
The surge in data generation necessitates significantly more processing power. This demand for enhanced processing capabilities directly translates into a growing market for the sophisticated equipment produced by Applied Materials.
The foreseeable future for Applied Materials involves continuous innovation and increased capacity investments.
The semiconductor industry is poised for further advancements, and companies like Applied Materials are expected to play a crucial role in facilitating these developments.
In conclusion, our long-term view is that Applied Materials will continue to grow and adapt in response to the increasing demand for data processing capabilities. The company’s role in enabling the production of faster and more efficient processors positions it favorably for sustained growth and innovation in the years to come.
Santeri Korpinen
CEO
