Applied Materials, Inc. (NASDAQ:AMAT) reported F2Q17 (AprQ) Rev/EPS modestly above Street estimates and guided F3Q17 EPS to $0.83, above CS/Street estimate of $0.64/$0.69. While the bears will likely declare it as another "peak", Credit Suisse thinks that they are missing the big picture - Semis are now growing faster than GDP, Semicap companies are growing faster than Semis, revenue volatility has declined, China is reversing customer concentration, and these companies are returning cash back to shareholders. Specific to AMAT, the Company is uniquely benefitting from the OLED and China FPD investments. Company commentary suggests that 2018 could be sixth consecutive year of rev growth - a sharp contrast to 1995 to 2012 - when the company never had more than two years of consecutive growth. As end market growth diversifies from consumer/handset to multiyear silicon intensive non consumer applications such as AI, Cloud, IoT, and Autonomous Cars – the firm sees a more sustainable growth. The firm sees potential for multiples to expand from ~20% discount to S&P, to at least inline with S&P. It is revising its FY17/FY18 EPS from $2.60/$3.00 to $3.13/$3.32 (vs Street at $2.71/$2.92). Increase TP of $54, reflecting 15x of CY18 EPS.
Positives: (i) Improved 2017 Outlook. The Company implied FY17 revenues to grow 32% y/y, versus prior +22% y/y. The Company also raised WFE growth from $37bn to $40.3bn. (ii) Artificial Intelligence opportunity. AMAT is a cheap way to play secular growth in AI (iii) China will provide meaningful growth in 2018/2019.
Negatives: (i) Display Revenues for AprQ missed guidance (ii) 2017 revenue growth for SSG+AGS is only ~20%-25%, well below LRCX/Tokyo Electrom at 35%y/y. However this is primarily a function of customer mix (iii) Cycle is a risk. In aggregate Semicap company revenues are tracking to +25% y/y, and WFE is >40bn (iii) OpEx guidance was higher than the firm’s expectation.