Applied Materials Continues To Underperform Even The Smallest Competitors (NASDAQ:AMAT)

Applied Materials (AMAT) may be the largest semiconductor manufacturer, but the company continues to underperform competitors based on YoY equipment revenue growth. Chart 1 shows semiconductor equipment revenue growth for 2020 and 2021 based on a bottom-up analysis of all companies. This revenue growth is for semiconductor equipment only and does not include service, spare parts, or non-semiconductor business segments.

Applied Materials revenue grew 42.9%, underperforming the overall semiconductor equipment market, which grew 44.7% to $103.2 billion in 2021 from $71.3 billion in 2020, according to The Information Network’s report entitled “Global Semiconductor Equipment: Market Share, Market Analysis, Market Forecast.“

Chart 1 shows that not only did AMAT lose market share against Japan’s Tokyo Electron (OTCPK:TOELY), a major competitor in etch and deposition tools, the company lost market share to smaller companies not included in the top seven shown in this chart, which grew 53.5%.

Chart 1

Comparing 2020 with 2021 market share for the semiconductor equipment industry, Chart 2 shows that the “others” category gained 2.1% share to reach 26.2% of the market. AMAT’s global market share decreased from 17.0% in 2020 to 16.8% in 2021. ASML (ASML) was the biggest loser in market share, dropping from 16.6% of the global market in 2020 to 15.6% in 2021. The company has suffered from supply chain shortages and a fire at its EUV lithography plant. Tokyo Electron was the only top company to gain market share growing to 11.7% in 2021 as semiconductor manufacturers increased their purchases of equipment from smaller companies.

Chart 2

Chart 3 shows QoQ revenue growth for the past two quarters for the top seven companies. I show these last two quarters of CY2021 because companies were beginning to discuss the impact of supply chain problems on revenue during earnings calls. These include AMAT, ASML, and Lam Research (LRCX). KLA (KLAC) increased in both quarters from the previous quarter, as the company judiciously controlled any supply chain disruptions. AMAT and LRCX demonstrated small QoQ revenue growth due to disruptions coming from joint supplier MKS Instruments (MKSI).

ASML’s Q4 QoQ revenues dropped 18.3% on supply chain problems. Prior to the quarter and based on a strong Q3, the company was geared to re-take AMAT as the leading equipment company as it was in 2019.

Chart 3

Investor Takeaway

Chart 4 shows that AMAT’s market share at 16.8% in 2021 is lower than it was when the company acquired Varian Semiconductor Equipment (VSEA) and replaced top AMAT management with VSEA management, including CEO Dickerson, in 2015. The computer-generated trendline shows the decrease from 2016 through 2021.

Chart 4

Financial metrics in Chart 5 show that AMAT’s EPS is currently 7.19, significantly lower than KLAC at 19.43 and LRCX at 32.10.

Chart 5

Chart 6 shows that KLAC’s gross profit margin is significantly higher at 60.77% compared to AMAT at 47.67% and LRCX at 46.30%.

Chart 6

Gross profit of AMAT is $11.52 billion, significantly higher than $7.65 billion for LRCX, and $4.92 billion as shown in Chart 7. This begs the question – with such high profits, why isn’t AMAT management making the “best-of-best” equipment that would enable the company to increase market share instead of years of decreasing share versus competitors?

Chart 7

Chart 8 shows that in the past year, stock price change is minimally different. Even with the other poorer financial metrics shown above, AMAT’s share price growth of 12.66% is not much different than 10.63%. This indicates that traders are purchasing semiconductor equipment stocks as a sector, and the poorly performing company like AMAT with losing market share is nearly the same as KLAC’s with a 55% share of the semiconductor metrology/inspection equipment sector.

Chart 8

Indeed, just 5.3% of KLAC’s revenue competes against LRCX, and that was only due to KLAC’s 2019 acquisition of Orbotech. Prior to that, KLAC didn’t compete head-to-head against LRCX in etch and PECVD. Nevertheless, both stocks have moved in tandem.

Against AMAT, that percentage increases to 7.5% because of competitive PVD products, in addition to etch and PECVD. But KLAC also competes directly against AMAT in mask and wafer inspection sectors of the metrology/inspection market. This direct competition represents just 5.2% of AMAT’s 2021 revenues that are in the metrology/inspection market, according to The Information Network’s report entitled “Applied Materials: Competing Analysis of Served Markets.“

Readers of this article will look at the stock performance of AMAT and interpret it as a disconnect with my analysis of the company based on its technical and market performance. But I must emphasize that market share is extremely important and will ultimately impact stock performance once investors stop trading the stock as part of the semi sector where good and bad perform comparably.

Why is it important? Because customers of equipment companies, namely semiconductor manufacturers, spend billions of dollars on equipment and want to buy the “best-of-breed.” These customers spend as much as nine months evaluating a piece of equipment before making a decision. If AMAT’s equipment is not best-of-breed, which is what I’m saying, it will lose share, as it has, to competitors who win the purchase order. When more of the same equipment is needed in the case of a capacity purchase to increase supply, more of the same system is purchased, thereby losing even more market share.

I can’t emphasize this enough. With its large profits (Chart 7) that dwarf competitors, the company should be making the “best-of-breed” equipment. AMAT management needs to hire the best personnel and spend as much money as it takes to gain market share instead of losing it. To be losing market share to even the smallest competitors with significantly lower revenues should be a wake-up call for management and investors.