Applied Materials Missed Its Fiscal Second- Quarter Earnings Estimates by a Penny, but is Still Optimistic About 2001 Capital Spending on Advanced Process Equipment for Copper Process and 300-mm Wafers

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Ed Wijaranakula, Ph.D.
Chief Investment Strategist, Infotix Systems, Inc. - May 19, 2001

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For the week ending May 18, the NASDAQ closed at 2198.88, up 91.45 points or 4.34 percent from the previous week's closing of 2107.43. Investors were at first reluctant to return to the

market despite an announcement of a 50 basis-point interest rate cut by the Federal Reserve and the reassurance that the Federal Reserve will remain vigilant about maintaining consumer confidence and stimulation of corporate capital spending.

Later in the week, the news that the U.S. economic outlook appears to be much better-than-expected, gave investors needed confidence that the U.S. economy will not drift into a recession and it is a time to "buy". The Department of Labor announced that jobless claims for the week ending May 11, fell for the second straight week to 380,000, the lowest

level in nearly two months while the Conference Board said that its Index of Leading Indicators rose 0.1 percent in April.

From a technical perspective, the NASDAQ has now broken a long-term resistance level of 2100 and is ready to move up higher in the short-term. While the NASDAQ could face the next resistance level at around 2800, our market sentiment trend continues to show an upward strength. We are expecting a possible V-shaped full recovery by September 2001 and the NASDAQ to revisit the 3000 level. For the week, the hedge funds and short sellers were unsuccessful in taking the market down and probably suffered significant losses in heavy to moderate volume trading.

Tech-investors were somewhat disappointed in the news that Applied Materials [NASDAQ:AMAT] missed its fiscal second-quarter earnings estimates by a penny and the company is not expecting to see significant improvements in its semiconductor capital equipment markets for the remainder of this year.

Applied's net sales dropped 13 percent from $2.19 billion last year to $1.91 billion, but managed to beat analysts' consensus estimates of $1.88 billion. The company blamed its low sales and weak profit margin on a pronounced slump in the chip industry due to slowing economies and customer order cancellations. "I believe we are now in the bottom of this cycle and waiting for the tipping point to recovery," said Dr.James C. Morgan, Applied Materials' chairman and chief executive officer.

Despite a severe downturn in the chip industry, Applied Materials said that chip makers are continuing to push forward with their plans for advanced chip manufacturing technology and purchases of tools in the area of developing processes including copper and low-k dielectrics layer deposition, device features with a size below 0.15 microns, and large diameter (300-mm) wafers. According to Dr. David N.K. Wang, Applied's executive vice president, purchases for tools used in processes below 0.10 microns made up nearly 40% of all equipment bookings.

There is enough reason to be optimistic that the 300-mm tool sales will continue to experience strong growth this year despite the overall gloomy outlook in the chip equipment market. According to Electronic News, a joint venture 300-mm fab between Hitachi Ltd. and United Microelectronics Corp.[NYSE:UMC] in Hitachinaka City, Japan has already begun producing field programmable gate arrays (FPGA) products for Xilinx [NASDAQ:XLNX]. Because the manufacturing cost for the next-generation Xilinx FPGA chips is significantly lower with a 300-mm wafer than a 200-mm wafer, Xilinx projects that in the next 12 months, up to one-third of their product revenues could come from 300-mm wafers.

We believe that other fabless chip makers will follow Xilinx's move. With an increasing demand from fabless customers for 300-mm silicon, the foundries could be forced to quickly ramp-up their 300-mm fabs or convert their old 200-mm to 300-mm fabs.

From a technical perspective, Applied Materials' share price has been trading in the range between $40 and mid-$50 since October 2000. With a gradual rise in Applied Materials' investor sentiment, we believe that Applied Materials' share price could break out of this trading range near-term and move to a new high.

We have presently set Applied Materials' price target at between $67 and $77 by September 2001. Nevertheless, investor sentiment for Applied Materials could shift negatively if the gloomy outlook in the chip equipment sector persists.

With a rise in the Index of Leading Indicators and aggressive cuts in the interest rate by the Federal Reserve, we maintain our conclusion that the U.S. Bancorp model proposed by Mr. Ashok Kumar during an interview on CNBC early this year, that the second-half of 2001 will not be a period of recovery, but a full-fledged consumer and manufacturing recession, is in complete disagreement with reality. Because Mr. Kumar's argument was based upon an erroneous model, we conclude that his recommendation that Intel's share will drop to below a $20 level, could be incorrect. Using our market sentiment model, we maintain our share price target for Intel [INTC] at between $39 and $45 by September 2001.

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About the Author: Dr. Ed Wijaranakula is presently the Chief Investment Strategist at Infotix Systems, Inc. Prior to Infotix Systems, he has worked with Intel, Hewlett-Packard, Micron, Motorola and Texas Instruments and has held senior as well as managerial positions in semiconductor manufacturing companies. He has published over 80 technical papers and holds more than 12 U.S. and foreign patents. His portfolio holds long positions or controls in INTC and XLNX.