You Really Need To Know About This Chip Fab Equipment Stock | Applied Materials | $AMAT

[@JamieK348]

Oh man you're a good at this, I've been in the semiconductor almost 18 years now having worked for Intel, LAM Research and most recently Applied Materials and finding your assessments of these businesses to be quite accurate. You know your stuff!

[@chipstockinvestor]

You are very kind, but there is so much to learn about this industry! Just a constantly curious investor, and I am frequently wrong in my assessments about semis and other companies. Would love some feedback on AMAT, one of my favorites!

[@JamieK348]

@@chipstockinvestor I like your sense of humility. I feel the same when it comes to investing in stocks. I like Applied Materials a lot (both as an investment, and company to work for); in fact I like working at Applied, more than LAM or Intel. But I think there might be slightly better hardware suppliers out there (from an investment perspective). I could be wrong but I feel Applied Materials tries to be a full service provider, and as such I think they sacrifice some operating efficiency vs. a company like LAM Research or ASML (but not a lot I think); LAM Research's focus is mainly on its' core competency which is Dry Etch and ASML on Lithography. Looking at the latest quarters' margins of these companies though Gross profit margins between LAM Research and Applied Materials do not look all that different coming in at 46% but Operating Margin's between the two companies is where I see some divergence LAM 33.5% vs. Applied at 29.5%. ASML's margins (Gross margin: 52% and Operating Margin: 33.5%) looks even better, but the company whose latest quarters' margins that really stand out is KLA-Tencor (Gross margin: 62%, Operating margin: 41% and Net margin: 37.5%,). I don't know that that necessarily makes a company like KLA-Tencor a better investment vs. an Applied Materials, but perhaps it bears keeping in mind.

[@chipstockinvestor]

@@JamieK348 this is fantastic insight, thank you so much! AMAT and ASML are the two horses I've bet on in WFE, but I hear what you're saying about AMAT. Lots of irons in the fire, including OLED (still need to get around to a video on Universal Display). You're actually the second commenter in recent weeks on KLA. Awesome company, really focused on yield equipment, which actually could be a big theme right now, no? Increasing yields is one of the best ways to increase margins, which I think fabs might focus on this year given the consumer slump. I did a write up back in Sept, but maybe should do a KLA video ASAP. Thoughts? www.fool.com/investing/2022/09/14/is-this-top-chip-stock-a-buy-with-limits-to-sales/

[@JamieK348]

@@chipstockinvestor KLA is not a very interesting or sexy company like the likes of Apple. In this space there are definitely those under-the-radar, boring companies that “no one talks about”. I am guessing as an investor (whom not only invests money in this space, but intellectual capital too), you know this all too well. BTW, KLA has many other metrology tools (besides defect analysis equipment) that are used too; not only in manufacturing, but in a customer support/R&D capacity as well. For example at LAM and Applied, we use KLA tools which measure film thickness (using a technology called Spectroscopic ellipsometry). This is essential for characterizing the thickness and uniformity of films dues to changes in: recipes, different materials, chamber condition, new parts etc.; their tools are also key in collecting SPC data and for characterizing the effectiveness of preventative maintenance. I am guessing ASML (in addition to using their defect analysis tools) uses their CD and Overlay tools to verify that the focus, alignment and symmetry of transferred patterns to the wafer is within spec. Development, changes and problems always arise in the industry, and without KLA’s equipment companies like LAM and Applied would not be able to advance their own tools (to meet the ever-growing scale demands that companies like TSMC is trying to achieve). I would argue KLA’s tools are “part and parcel” to the lifeblood of the industry, and can not see any circumstance in which the need for the type of equipment they produce goes away. So in that sense I am pretty confident the need for KLA’s technology will scale proportionally to that of the overall industry. But I don't think the adoption rate of their tools outpaces the industry, even though yes improving wafer yield does improve manufacturing financial margins. But their tools are typically adopted at the rate of/ in proportion to other tools in the fab because they are used hand in hand with those tools.

[@chipstockinvestor]

@@JamieK348 again thanks so much for weighing, incredibly valuable insight here! At this point, sounds like KLA could simply be a good buy if the valuation is right. Keeping it on my radar!

[@wlf9108]

Just bought a small position in AMAT. thanks.

[@chipstockinvestor]

Hi there @wlf9108, have you seen any of our updated videos on AMAT?

[@Carol-cb9yu]

You put it all together again.

[@lennartneubauer1]

Thank you so much for the video!

[@chipstockinvestor]

Thank you for watching!!

[@lennartneubauer1]

What free cash flow growth rates would you use for a DCF analysis for the next years? I have analyst estimates for the first three years (2023 +50%, for 2024 -27% and 2025 +20%) and personally use +12% for 2026-2030. Does that sound realistic to you?

[@chipstockinvestor]

I always leave myself a margin for error. Play around with mid single digit rate, try a high single digit rate, and see what you get.

[@John-uo5ro]

Hi. I’ve listened to someone who added ASM international (not ASML) into the group along with Amat, kla and lam. What are your thought here? Does Asm belong with these 3?

[@chipstockinvestor]

Yes that is correct. It's confusing because the two names are so close, but ASML and ASMI (ASM International) are two different Dutch companies that both make wafer fab equipment.

[@vineet1085]

hi subscriber here, a lot of its revenue is coming from China...and US is restricting supply to China..which will hurt AMAT's revenues..any thoughts ?

[@chipstockinvestor]

Big update coming on that this week! But the company was still forecasting growth, despite some of it's machines and tech being restricted.