Cowen analysts led by Timothy Arcuri believe Applied Materials, Inc. AMAT is "dreaming" about OLEDs and mid-$2 EPS under a TEL merger scenario. According to the analysts, sustainability is a valid concern, but multiple vectors continue to undermine the thesis — WFE share gains are playing out as SSG revenues are up over 10 percent so far this year. "Ultimately, the mid $2's EPS 'dream' under at TEL merger scenario is finally back on the table," Cowen summarized.
The brokerage retained its Outperforming rating and boosted the price target to $26 from $24 on the stock.
Orders May Moderate
Cowen analysts said guidance indicates orders may moderate modestly, and the brokerage does not expect a reset, as OLED vectors remain strong. Since the Street remains skeptical of Applied's ability to reproduce the ~$2+ EPS "that was dreamable under a TEL merger scenario," Arcuri calls the upcoming quarter a "watershed Q."
The brokerage elaborated, "Now, we are arguably back to a situation where AMAT could lay out a $2.50 or even $3/sh EPS scenario at its analyst meeting in September given four factors:
- 1. "OLED vectors (AAPL + TV ramp + SAM expansion)
- 2. "China semis (should add ~$2–3 billion/year to WFE and add ballast)
- 3. "Foundry mix shift (10/7nm is a lot more exciting/economically attractive than 20/16nm); and
- 4. "Samsung capex trajectory (we think semis capex is down >50 percent this year, likely to snap back in '17)."
Cowen added, "Most importantly, with SSG revenue likely up ~12–13 percent Y/Y in C2016 against a flat to up WFE environment, the #'s are clearly supporting the share gain/technology leadership mission set forth by mgmt post the TEL deal (we would NOT conclude LRCX is losing share, rather we see TEL as a share loser and we also note ASML litho sales ex EUV are also down a bit Y/Y too (albeit likely to snap back w/EUV). On the back of higher ests (C2016 to $1.89, C2017 to $2.03), we raise the target from $24 to $26 which is still only ~13x (discount to semis median) applied to average of C2016/2017."
Investment Basis
The analysts explained their basis for rating Applied Materials shares by pointing out three key factors. The first is that Applied is a "transistor performance" company, more so than its peers ("and thus in a sweet spot to capture more of the spending mix as customers adopt new transistor architectures in an effort to ward off a slowdown in Moore's Law").
Secondly, the brokerage said, "The disproportionate leverage to where spending will mix should drive a reversal in the 15-yr trend of WFE share loss."
And thirdly, "New management is reinvigorating the innovation pipeline and focusing on R&D and spending on markets where it could bring differentiation."
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