Applied Materials (AMAT +1.05%) may seem at first glance like a boring company. It sells the fabrication tools that semiconductor companies use to make the components that in turn power fun things like smartphones and tablets. So you could say the company is about two steps removed from cool.
But that's OK, because despite its lowly position in the fun department, there are some very exciting things happening at Applied Materials that investors should be paying attention to -- besides its 90% stock price gain over the past 12 months:
Image source: Getty Images.
1. It has a very substantial R&D budget
In order to benefit from a fast-moving semiconductor market, companies in this space need to invest in new technologies and follow shifting trends. That's why it's important that Applied Materials is smartly spending a fair amount of resources -- $1.5 billion in fact -- on research and development.
The company's strong focus on R&D helped it catch the recent focus on 3D NAND chip architecture (a high-precision way of making memory chips with lots of capacity but that only take up a small amount of space). Demand for such chips has advanced faster than the broader chip market, and its rapid growth is expected to continue this year.
2. Applied's equipment footprint is huge
Applied Materials benefits from a diversity of equipment sales that span much of the semiconductor fabrication process. While many of its competitors focus on one specific part of semiconductor creation, Applied addresses nearly every stage of the process, and builds out very strong relationships with its clients as a result.
The company says it has 1,000 unique tool-types, and over 30,000 tools installed in customer fabs around the globe, along with engineers who are uniquely trained to work on its equipment. This global reach has allowed Applied to become the top chip manufacturing equipment vendor in the industry, and it show no signs of being overtaken by competitors.
3. Cloud investments and the Internet of Things could bring more growth
While the semiconductor industry can be very cyclical, the growth of the Internet of Things (IoT) could help offset this.
By 2020, there will be an estimated 50 billion things connected to the Internet collecting data that will need to be analyzed, and making new automation processes available. This means companies will need more servers to process the coming 50 trillion GB of data that companies will be processing, and they'll need new semiconductor manufacturing equipment to build that capacity.
Gartner estimates that cloud-computing spending will total $1 trillion between 2016 and 2021 as more companies shift to cloud-first strategies. As this happens, Applied will be there to help its clients build the technology they need. "Our customers will continue to benefit from making big investments in leading-edge capacity to power devices and the cloud," CFO Bob Halliday said on its latest earnings call. And Applied should benefit in turn.
4. Display technologies are humming along
Most of Applied Materials' business focuses on chip-making equipment, but the company has also built out its position in display manufacturing equipment as well. It is a leading supplier of equipment to make both LED and OLED displays for TVs and smartphones. Management said on the Q1 2017 call that it expects to triple its opportunity in display products over the next few years, and thinks its customers will invest about $2 billion more this year in equipment than they did in 2016.
"We're really in the in the early innings of the adoption of OLED into mobile devices," CEO Gary Dickerson recently said on CNBC, and even after $2 billion in investments the industry will only be at 55% total adoption over the next few years. That means there's plenty more room for Applied to benefit from display equipment sales.
5. The company is seeing strong growth overall
Dickerson also said on the CNBC interview, "We're setting records. Every quarter, our markets are strong and our position in the markets has never been stronger." He was referring the company's growth in nearly every segment, and its anticipation for even more.
The company had a 16-year high in semiconductor systems orders in the first quarter, record orders in services, and strong display orders. The company's management was optimistic on the latest earnings call that 2018 and 2019 will continue to bring more growth in display, semiconductor, and software revenues.
If Applied can continue to build out all of these strengths, and fend off the chip industry's cyclical nature, shareholders could be in for even brighter days ahead than they've seen lately.
