Applied Materials Sees Rising Demand as US Eyes Subsidies for Chip Fabs

Applied Materials said its quarterly revenues and profits are on pace to grow faster than its competitors as global demand for chip manufacturing gear surges amid an ongoing semiconductor shortage.

The Santa Clara, California-based company said its second-quarter sales would grow to about $5.39 billion, up from $3.96 billion a year ago, bolstered by demand for memory and computer chips used in everything from smartphones and data centers to cars. The semiconductor industry bellwether said it expects the global market for its advanced chip-making tools to be worth north of $70 billion this year.

"Based on the current outlook, we expect to again grow faster than the market for the year as a whole," said Gary Dickerson, Applied Materials' president and CEO, on a conference call with industry analysts.

Applied Materials is one of the linchpins of the semiconductor market, selling tools that are used to manufacture memory, computing, and other types of chips to the likes of Intel, Texas Instruments, Micron and Samsung. It also sells to contract chip manufacturing leader TSMC, which produces chips for over 500 customers globally, like Apple, Qualcomm, Nvidia, as well as Advanced Micro Devices.

The tools it sells are used to manufacture virtually every new chip and advanced display in the world. Its largest customers place orders for its tools months ahead of time to prepare for future demand.

As the coronavirus upends businesses around the world, cloud giants including Amazon and Microsoft, are upgrading the chip-heavy hardware in their data centers. Capital spending in the cloud is on pace to increase by more than 15% in 2020, placing more pressure on IC manufacturers to boost supply and upgrade chip fabs. That translates to a boost in investment in chipmaking tools, Applied Materials said.

The upbeat forecast comes as the automobile industry and other sectors are reeling from an ongoing shortage of semiconductors. The shortage is largely the result of massive swings in demand over the last year as the deadly virus spread around the world. The situation has halted production at the world's top car manufacturers, resulting in a global scramble to procure supplies of chips and other key parts.

In the automobile industry, where there are severe shortfalls of chips, demand is on pace to improve by 15% in 2021, the company said. According to Applied Materials, sales of semiconductor gear used by foundries and other leading logic chip manufacturers are also "very strong." Investments in memory chips are also driving demand for chip-making tools as the markets for DRAM and NAND rebound.

"We have seen a continued acceleration of demand in our semiconductor business as major macro and industry trends fuel increasing consumption of silicon across a wide range of markets and applications,” he said, adding that orders for fab equipment from memory, logic, and foundry customers will continue to improve in the second half of the year. “We have strong momentum around the company," he added.

Applied Materials is also trying to tap into efforts to bring more chip manufacturing to the US and reinforce the nation's leadership in chips. Top leaders in the US semiconductor industry have urged President Biden to expand subsidies and other incentives for building more advanced IC production plants. US firms are calling for federal funding to counterbalance China's growing aggressiveness in the market. China is spending hundreds of billions of dollars to boost its self-sufficiency in chips.

The effort originated out of US concerns about China's growing share of global chip manufacturing and the US's declining share. The US Congress passed the CHIPS for America Act that could give a boost to Applied Materials and rivals such as Lam Research by rolling out subsidies for building up fabs in the US. Part of the proposed package of incentives includes tax breaks for buying chip gear.

Chip-making is one of the most extravagent manufacturing processes in the world. Constructing a state-of-the-art production plant for logic chips costs over $15 billion, according to industry analysts.

Today, most US semiconductor companies are fabless. They outsource their production of advanced chips to Taiwan's TSMC and South Korea's Samsung, the top contract chip foundries in the world. To ease political pressure, these foundries are trying to expand their US manufacturing footprint. TSMC plans to invest billions of dollars in a future 5-nm chip production plant in the US. Samsung is also in discussions to expand in the US with an advanced fab, possibly located in Austin, Texas or New York.

While TSMC and Samsung operate their largest and most advanced plants in Taiwan and South Korea, the planned US fabs will probably have less total production capacity. That plays directly into the hands of Applied Materials and other equipment vendors. Executives said building a pair of production plants that output the same number of chips per year as one large fab will require more chip-making gear.

"We've been engaged with customers and also government initiatives around investments in different locations," Dickinson said. He added: "That creates an opportunity for us. This can play out over time."

For the first quarter of the 2021 fiscal year, Applied Materials said sales soared more than 20% to $5.16 billion, up from $4.16 billion in the first quarter of 2020. The company's total profit came to $1.13 billion, or $1.22 a share, up from $892 million in profit, with earnings of 96 cents per share, in the same quarter last year. The Silicon Valley firm said it returned more than $200 million of dividends to its shareholders.