Applied Materials AMAT: AI is rising across the board, when will it be AI Capex's 'family bucket' turn?

Applied Materials (AMAT.O) is a veteran company in the U.S. semiconductor industry, established in 1967, and remains one of the leaders in the global semiconductor equipment industry. When viewed over a long timeline, Applied Materials AMAT is undoubtedly a long-term bull company and has always been an important part of the semiconductor supply chain.

After more than 50 years of industry ups and downs, why has Applied Materials been able to remain "evergreen" and maintain a market capitalization above $100 billion?

Dolphin Research will review $Applied Materials(AMAT.US) from the aspects of development history, product capabilities, industry position, and business situation, and conduct corresponding performance estimates and investment judgments for the company.

This article mainly answers the following questions about Applied Materials AMAT:

1) What are the core products of Applied Materials AMAT, and how competitive are they in the market?

2) What is the relationship between Applied Materials AMAT's revenue and wafer fab capital expenditures, and how do the company's products perform in the logic and memory markets?

A stable management team is an important factor for the continuous growth of Applied Materials AMAT. The company has had only three CEOs in nearly 50 years, ensuring consistency in its development strategy. Since the 1970s, the company has always focused on the semiconductor equipment field.

With decades of accumulation, Applied Materials AMAT has achieved market-leading levels in areas such as thin film deposition equipment and CMP equipment, and has established long-term, stable partnerships with major wafer manufacturers like TSMC and Samsung.

The company penetrates customers with its advantageous products and builds a "full suite of equipment," gradually increasing the types and shares of equipment in wafer fabs, thus accounting for 10-20% of wafer fab capital expenditures, further binding the fabs. Applied Materials AMAT benefits from each semiconductor cycle, and whenever the semiconductor manufacturing industry increases capital expenditures, the company experiences another performance boost.

For detailed information, please read the specific content of this article, and Dolphin Research will also conduct performance estimates and investment judgments for Applied Materials AMAT in the next article.

For a detailed analysis of Applied Materials (AMAT.O) financial report by Dolphin Research, see below:

I. The "Past and Present" of Applied Materials

From the business composition of Applied Materials (AMAT.O), the company is still a pure semiconductor equipment company. Currently, nearly 80% of the company's revenue comes from semiconductor, display panel, and related equipment, while the remaining 20% is from related services such as equipment maintenance and parts usage management. Therefore, in reality, all of Applied Materials' revenue revolves around equipment sales and after-sales related services.

Looking at the development history of Applied Materials, the company's management has been relatively stable. The company has had only three CEOs in nearly 50 years, and each CEO's term has lasted more than 10 years.

① James C. Morgan (1975-2003) period: During the "recession crisis" of the semiconductor industry in the mid-1970s, AMAT's firefighter, cut off the wafer manufacturing business, focused on the semiconductor equipment field. Based on thin film deposition equipment, the company gradually acquired Opal (chemical polishing equipment CMP), Orbot (inspection), entered the CMP and inspection fields, and gradually became a comprehensive equipment supplier in the semiconductor industry;

② Michael R. Splinter (2003-2013) period: James laid the basic business map of Applied Materials, while Splinter's period mainly involved a smooth business transition. In addition, the company also acquired the semiconductor ion implantation leader Varian, strengthening its market position in ion implantation;

③ Gary E. Dickerson (2013-present) period: As the semiconductor industry entered the advanced process field, during this period, the company launched the Endura® platform (integrated semiconductor thin film deposition three major vehicles PVD/ALD/CVD), laid out advanced packaging equipment. The company invested $5 billion to build the EPIC R&D center, focusing on the research and development of GAA transistors, backside power supply, 3D DRAM, and other fields.

The development of Applied Materials itself is a "history of the semiconductor industry's development." In the 1970s-1980s, the incremental revenue of Applied Materials mainly came from Japan. At that time, Japan had 12 of the top 20 semiconductor companies in the world. With the rise of Samsung, SK Hynix, and TSMC, in the 1990s, South Korea and Taiwan gradually became the top two sources of revenue for Applied Materials. With the development of the semiconductor industry in mainland China, it has recently become the largest source of revenue for Applied Materials, accounting for more than 30% of revenue.

From the changes in regional revenue of Applied Materials, it follows the rhythm of the semiconductor manufacturing industry's industrial transfer, in the order of "Japan-South Korea and Taiwan-mainland China." This also reflects the company's product strength, which has been favored by customers in different regions at each stage.

II. Applied Materials and Semiconductor Equipment

In the semiconductor supply chain, semiconductor equipment is mainly located upstream. Downstream customers are basically semiconductor manufacturers like TSMC and SMIC, and semiconductor equipment covers the entire process of the manufacturing stage.

According to SEMI data, if you want to invest in building a wafer fab, semiconductor equipment is the largest cost item, accounting for about 70-80% of the total cost. As the core equipment of semiconductor manufacturing, lithography machines account for 30% of equipment expenditure, etching equipment accounts for about 25%, and thin film equipment accounts for about 20%. In total, these three types of equipment account for more than 50% of the total cost.

From the wafer manufacturing process, there are mainly seven steps: "silicon wafer manufacturing-thin film deposition-lithography-etching-doping-metal interconnection-packaging".

If we use a more vivid analogy, wafer manufacturing can be compared to "building a skyscraper." The above process can be understood as "laying the foundation-applying waterproof/insulation layers-drawing blueprints-engraving patterns-making switches-installing wires-adding protection". Among them, thin film deposition (applying insulation layers), lithography (drawing blueprints), and etching (engraving patterns) are the most core steps in wafer manufacturing.

Except for lithography, Applied Materials AMAT's equipment basically covers the intermediate steps of wafer manufacturing, especially since the company can provide high-value etching equipment and thin film deposition equipment in the supply chain.

In the semiconductor equipment industry, Applied Materials AMAT and ASML are the two largest semiconductor equipment companies globally, accounting for more than 20% of the total global semiconductor equipment sales. Among them, ASML's lithography machine field is the largest value segment in semiconductor equipment. Applied Materials mainly relies on a comprehensive product matrix, with equipment layout in multiple segments, allowing the company to occupy the top two positions in the semiconductor equipment field.

2.1 Thin Film Deposition Equipment - "Applying Waterproof/Insulation Layers"

Thin film deposition is an important step in the wafer manufacturing process, mainly growing various conductive and insulating thin film layers on the wafer.

The specific process involves depositing a layer of film material to be processed on the silicon wafer substrate. The deposited film materials can mainly be of several types: dielectric materials (silicon dioxide, silicon nitride, polysilicon, etc.), metal materials (copper, tungsten, titanium, titanium nitride, etc.), and semiconductor materials (single crystal silicon, polysilicon, etc.).

For different materials and scenarios, the current main thin film deposition methods are physical vapor deposition (PVD), chemical vapor deposition (CVD), and atomic layer deposition (ALD).

From the final deposition effect, PVD is highly directional (precise coverage), suitable for depositing metal materials; CVD and ALD have better deposition coverage, suitable for depositing dielectric materials, where ALD requires high precision in film thickness but has a slower deposition speed.

Applied Materials AMAT started with thin film deposition equipment, which is also the company's main source of revenue. The company still holds a leading position in the thin film deposition field, with layouts in PVD, CVD, and ALD.

① Physical Vapor Deposition PVD Equipment: Similar to "using a spray gun to melt metal and spray it on the silicon wafer," suitable for metal plating. Applied Materials AMAT is dominant, with a clear advantage. The global PVD equipment market space is about $4.5 billion, with Applied Materials occupying more than 80% of the market share. Competitors in the market include Ulvac (Japan), Evatec (Switzerland), and other manufacturers.

Applied Materials AMAT has led PVD technology development since the 1980s, with over 1,200 PVD-related patents covering core processes such as magnetron sputtering and ion beam deposition. Its RF PVD technology patent layout directly limits competitors from entering the high-end market.

② Chemical Vapor Deposition CVD Equipment: Similar to "using gas to 'blow' a thin film on the silicon wafer surface," suitable for insulating layer plating. Applied Materials AMAT is in the first tier, relatively leading. The global CVD equipment market space is about $13 billion, with Applied Materials holding about 30% of the market share, alongside LAM (21%) and TEL (19%) in the first tier, still having a certain advantage.

Applied Materials AMAT's CVD equipment covers the entire technical route of PECVD, LPCVD, etc., and its Endura platform supports multiple processes such as copper interconnects, cobalt films, and tungsten plugs through modular design, achieving metal gate deposition thickness deviation <0.1nm at the 3nm node.

③ Atomic Layer Deposition ALD Equipment: Highest precision, like "stacking atoms one by one," suitable for ultra-thin films (e.g., below 3nm nodes, Applied Materials has a certain market share. The global ALD equipment market space is about $3 billion, with Applied Materials' market share estimated at around 10%. The company once planned to acquire Tokyo Electron, but the acquisition was unsuccessful (if successful, it would have been comparable to ASMI's market share).

Due to the need for deep integration of ALD equipment with process technology, ASMI and TEL locked in advanced process orders early through joint R&D with TSMC and Samsung, while Applied Materials AMAT's ALD equipment is more of a supplement to its "deposition + etching" comprehensive solution, failing to establish independent customer stickiness, leading to repeated loss of share in advanced process tenders.

2.2 Etching Equipment - "Engraving Patterns"

The lithography step is similar to "drawing a design on the silicon wafer," mainly monopolized by lithography equipment manufacturers like ASML, and Applied Materials AMAT is not involved in this field.

After lithography, the excess parts need to be removed according to the blueprint, which is the etching step. The etching step mainly uses chemical gases or plasma (similar to "charged particle flow generated by high voltage") to "blow" on the silicon wafer, "corroding" the "softened parts" on the photoresist and the underlying thin film together, leaving the required circuit pattern.

Currently, Applied Materials AMAT plays a follower role in the etching field, occupying about 15% of the market share. In the etching market, LAM and Tokyo Electron are the market leaders.

Applied Materials' etching equipment has advantages in the metal filling and dielectric layer deposition steps of the TSV process. Its Endura platform integrates physical vapor deposition (PVD) and chemical vapor deposition (CVD), complementing the etching process and providing an overall solution through equipment combination.

Although Applied Materials AMAT's Centura etching equipment can synergize with the company's branded thin film deposition and other equipment, its technical capabilities still lag behind LAM. LAM leads in low-temperature dielectric etching (such as Lam Cryo 3.0) and high aspect ratio (HAR) etching technology, with its Sense.i platform optimizing etching uniformity through AI-driven processes.

2.3 CMP Equipment - Chemical Mechanical Polishing Equipment

CMP equipment can be applied in wafer material manufacturing, semiconductor manufacturing, and packaging testing stages. In the wafer manufacturing process, CMP equipment is mainly used to remove excess material from the surface to ensure the smooth progress of subsequent processes. CMP equipment acts like a "super roller," polishing the wafer surface to be extremely flat, ensuring the precision of subsequent processes.

In the CMP equipment field, Applied Materials AMAT also holds an absolutely leading position, occupying more than 60% of the market share. The main competitor is Japan's EBARA, and the two companies together account for more than 90% of the market share.

Comparing the CMP products of the two companies, it can be seen that Applied Materials AMAT's CMP equipment is more advanced. The company can provide two major technology platforms, Mirra (focused on 150-200mm) and Reflexion (focused on 300mm), which can basically meet the needs of various types of materials and can be applied to the most advanced 3nm process technology, while Japan's EBARA's CMP products can only be applied to certain materials.

Although Japan's EBARA products have a certain price advantage, with its technological leadership, Applied Materials is more likely to gain recognition from major wafer manufacturers (such as TSMC).

2.4 Applied Materials' Advantages in the Semiconductor Equipment Field

Applied Materials AMAT has grown to become a top 2 company in the semiconductor equipment industry mainly due to the following advantages:

a) Leading position in niche fields: Applied Materials AMAT is in the global number one position in the deposition (PVD, CVD) and polishing (CMP) equipment markets, especially in PVD equipment and CMP equipment, where it is significantly ahead of the second place. The leading advantages in these types of equipment help the company gain customers from global large wafer manufacturers (such as TSMC, Samsung);

b) Rich and complete product system: In the semiconductor manufacturing process, Applied Materials AMAT can provide a series of products, including diffusion furnaces, etching equipment, CVD, PVD, ALD, CMP, ion implantation equipment, etc., covering the process steps from material creation, forming to modification, and analysis, being the only equipment supplier in the world that can provide a complete line solution.

c) Production line compatibility: Applied Materials AMAT's equipment can achieve complete line compatibility, with more consistent parameters, interfaces, processes, and operating systems between different equipment of the same company. Through complete line compatibility, it can improve production line yield and reduce overall production costs. The company's IMS system can complete different production processes in one system, improving production efficiency while also reducing corresponding customer expenses;

d) Extensive customer resources: Based on the company's nearly 50 years of experience in semiconductor equipment, the company itself has already covered many major semiconductor manufacturers, such as TSMC, Samsung, Intel, etc. Large customers need the company's leading products in PVD and CMP, and the company's excellent equipment integration capabilities, so downstream customers will purchase more semiconductor equipment from the company.

Overall, Applied Materials AMAT's current business focus is concentrated in the semiconductor equipment field, especially in thin film deposition, etching, and CMP equipment. Based on the advantages of thin film deposition equipment and CMP equipment, the company continues to enrich product types and expand production line integration capabilities, gradually securing its leading position in the semiconductor equipment field.

III. Applied Materials' Downstream - Logic + Memory

Applied Materials AMAT's semiconductor equipment revenue is mainly affected by the capital expenditures of downstream manufacturers. When breaking down the company's semiconductor equipment downstream market, it can be seen that nearly 70% of the company's semiconductor equipment business comes from logic customers such as wafer foundries (TSMC, Intel, etc.), while the rest mainly comes from memory customers (Samsung, SK Hynix, etc.).

3.1 Logic Market

The wafer foundry and logic market is the company's largest source of revenue, mainly because the market demand for logic in semiconductors is more extensive. TSMC, Intel, SMIC, and other manufacturers have large capital expenditures every year, with about 70-80% used for semiconductor equipment purchases, including Applied Materials AMAT's thin film deposition equipment, etching equipment, and CMP equipment.

Dolphin Research has compiled the annual capital expenditures of the world's core logic manufacturers, including TSMC, SMIC, Intel, Samsung's wafer foundry business, UMC, and GlobalFoundries.

In 2021-2022, mainly driven by the semiconductor supercycle, the capital expenditures of core logic manufacturers increased significantly. As the semiconductor cycle began to decline, overall capital expenditures also fell back (even TSMC's annual capital expenditures shrank from $36 billion to $30 billion).

Driven by AI chip demand, especially related demand for NVIDIA GPUs and Broadcom ASICs, TSMC will further increase its capital expenditures to about $40 billion in 2025 (an increase of nearly $10 billion per year). However, due to significant cuts in capital expenditures by other customers, TSMC's increase only reversed the downward trend and did not lead to a substantial increase in logic capital expenditures.

The semiconductor equipment market demand is still affected by "Intel falling behind" and "Samsung's sluggishness," with the former reducing capital expenditures to $18 billion and the latter halving the capital expenditures of its wafer foundry department (to about $3.5 billion).

Overall, Dolphin Research expects the total capital expenditures of the seven core logic chip manufacturers to be around $76 billion, a year-on-year increase of 1.9%.

If we fit Applied Materials AMAT's wafer foundry and logic revenue with the capital expenditures of the above core seven logic companies, it can be roughly seen that Applied Materials' semiconductor equipment accounts for about 10-20% of the total capital expenditures of logic wafer manufacturers.

In recent years, Applied Materials' share has increased, mainly driven by the increase in capital expenditures of wafer manufacturers in TSMC and mainland China.

3.2 Memory Market

Outside of wafer foundries, memory IDM manufacturers are also major customers of Applied Materials AMAT, accounting for about 20-30% of the company's revenue.

Due to the cyclical nature of the memory industry itself, companies will also adjust their capital expenditure plans according to industry cycles. Dolphin Research has compiled the capital expenditures of the core three memory manufacturers (Samsung's memory department, SK Hynix, Micron), and in 2022, the peak of the last round of memory industry investment, the total capital expenditures of the three memory manufacturers fell back as the cycle declined.

Driven by AI storage demand, the total capital expenditures of the three memory manufacturers are expected to increase by 50% in 2025, reaching about $60 billion.

After obtaining related HBM orders from companies like NVIDIA, SK Hynix and Micron have significantly increased their capital expenditure targets in 2025. However, Samsung's memory department's capital expenditures remain relatively stable due to its products' inability to enter NVIDIA's supply chain.

If we fit Applied Materials AMAT's memory revenue (DRAM and Flash memory) with the capital expenditures of the above core three memory companies, it can be roughly seen that Applied Materials' semiconductor equipment accounts for about 10% of the total capital expenditures of memory IDM manufacturers. In comparison, Applied Materials AMAT's equipment share in memory factories is slightly lower than in logic factories.

Applied Materials' semiconductor equipment focuses on logic demand, while LAM focuses more on the memory field. For example, LAM's etching equipment has also developed the advantage of Lam Cryo™ 3.0 low-temperature etching technology, which is especially important for the manufacture of 3D NAND memory chips, meeting the demand for more vertical stacking of memory cells, thereby achieving higher storage capacity on the same chip area.

Overall, in this article, Dolphin Research mainly reviews the product capabilities, industry position, and business situation of Applied Materials AMAT:

a) The regional revenue changes of Applied Materials are essentially a microcosm of the semiconductor manufacturing industry's industrial transfer. From Japan in the 1970s, South Korea and Taiwan in the 1990s to mainland China today, it has always aligned with the needs of core capacity areas, adapting to different stage customers (such as TSMC, SMIC) with product strength, and achieving revenue growth through capacity transfer, with more than 30% of revenue from mainland China, proving its precise grasp of industry trends;

b) In the pattern of ASML monopolizing lithography equipment, Applied Materials focuses on key steps such as etching, deposition, and CMP, building barriers in niche tracks with PVD (market share over 80%) and CMP (market share 64%), avoiding red ocean competition, and becoming a "must-have choice" for wafer fabs besides lithography machines through "multi-equipment collaboration + complete line solutions," proving the strategic value of deep cultivation in niche tracks;

c) Dual drive of logic and memory: Facing the cyclical fluctuations of the semiconductor industry, Applied Materials uses the logic market (accounting for 70% of revenue) as the basic plate to hedge the strong cyclical risk of the memory market (accounting for 20-30%). In 2025, the logic end will achieve stable growth driven by TSMC's AI chip demand, and the memory end will be driven by the rebound in HBM-related expenditures, with complementary layouts in both markets, allowing it to remain relatively stable amid industry fluctuations.

Overall (a+b+c), Applied Materials AMAT's position in the semiconductor equipment industry is difficult to replace in the short term, with obvious scarcity and stability.

However, in a mature semiconductor market, the company's nature is more of a cyclical stock with a stable industry position, significantly affected by the capital expenditure cycles of semiconductor wafer fabs and memory manufacturers. When the semiconductor cycle is weak, Applied Materials' performance is more of a dormant period; when the semiconductor cycle rises, Applied Materials will usher in another leap.

In this wave of AI cycle-driven downstream demand explosion, among core customers—wafer fabs, due to capacity reuse (AI chips can reuse the original mobile phone chip production line), the overall need for increased capital expenditures is not much.

The capital expenditure driven by AI on upstream wafer and memory manufacturers mainly lies in new HBM memory production lines and new COWOS packaging production lines. Applied Materials does not have an advantage in the memory equipment field, with the advantage lying in Lam Research, while the pillar customer—wafer foundry's production line mainly reuses the "trained" existing capacity of mobile phones, so in this wave of AI cycle, AMAT has not shown a strong prosperity.

Dolphin Research will specifically conduct performance estimates and valuation judgments for Applied Materials AMAT in the next article, so stay tuned.

Risk disclosure and statement of this article: Dolphin Research Disclaimer and General Disclosure