Why Applied Materials Is Needham's Top SemiCap Pick For 2021

As the wafer fab equipment industry dynamics evolves, Applied Materials, Inc. AMAT is a potential winner in 2021, according to a Needham analyst. 

The Applied Materials Analyst: Quinn Bolton maintained a Buy rating on Applied Materials and upped the price target from $82 to $110.

Needham named the stock as its top semiconductor capital equipment pick for 2021 and also added Applied Materials to its Conviction List.

The Applied Materials Thesis: Applied Materials faced headwinds in the last WFE cycle, as NAND, its weakest segment, led industry growth, Bolton said in a Wednesday note.

Additionally, extreme ultraviolet lithography insertion squeezed the company's share in the foundry/logic segment, the analyst said. 

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In 2021-2022, the industry will see the next technology inflection in DRAM, he said.

Technology traditionally used in the foundry/logic segment, including the use of high-K metal gate for DRAM periphery CMOS and logic-like interconnects, is now migrating to the DRAM segment, Bolton said. 

Additionally, new major inflections in the NAND and foundry/logic segments are unlikely over the next couple of years, the analyst said.

For Applied Materials, this means the headwinds of NAND and EUV should abate in the new cycle, he said. 

Needham estimates that DRAM WFE will grow by about 20% in 2021 and NAND WFE will stay flat.

Foundry/logic will likely grow by a mid-single digit percentage, rendering the overall WFE growth to a high single-digit range in 2021, Bolton said. 

"We expect the DRAM and foundry/logic segments will lead WFE growth and the NAND segment will lag in 2021-2022, resulting in a WFE mix that plays to AMAT's strength."  

Applied Materials will gain modest share in 2021, in Needham's view, with its Semiconductor Systems revenue growing by roughly 10% year-over-year.

Out of favor and reflecting a modest loss of WFE share, Applied Materials stock has seen its forward P/E multiple fall three to four turns below that of its closest peers, the analyst said. 

"However, we believe the tide is turning."

AMAT Price Action: At last check, Applied Materials shares were rising 3.26% to $87.02. 

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