Why Needham Added Applied Materials to Conviction List; What It Sees for Sector Growth Ahead

In a Tuesday letter to Intel’s board of directors, hedge fund manager Dan Loeb rips the company for, among other things, failing to keep up with competitors like Samsung and Taiwan Semiconductor in the development of new chip-making technology. Intel shares are down more than 15% in 2020, while other chipmakers have flourished, including Nvidia (up 75% this year) and AMD (up about 60%).

Another segment of the semiconductor industry that has skyrocketed this year is the one that supplies the technology and machines that actually make the billions of chips that are sold every year. For the most part, these semiconductor equipment companies have had a strong 12-month run, even including the mid-March collapse caused by the COVID-19 outbreak. Their share price appreciation this year has ranged from around 18% to 75%. And it could be getting better.

Needham raised its price target on Applied Materials Inc. (NASDAQ: AMAT) from $82 to $110, selected the stock as its top pick in the semiconductor capital equipment segment, and added the stock to its Conviction List. After noting that this market favored NAND chips in its last growth cycle (Applied Materials’ “weakest segment”), Needham believes that the next cycle will favor the DRAM and foundry/logic segments, playing to the company’s strength.

Looking at the industry as a whole, Needham said, “There is no denying that all leading [semiconductor capital equipment] players have great businesses.” Here’s our look at six of those companies as we head into a new year.

Applied Materials

Applied Materials makes and sells a variety of manufacturing systems used to make semiconductor chips. The company also makes products for manufacturing liquid crystal displays (LCDs) and organic light-emitting diode (OLED) displays. More than half the company’s sales are to chip foundries (fabs), with the remaining 44% divided equally between memory chip and flash memory makers.

The stock closed at $84.27 on Tuesday, in a 52-week range of $36.64 to $90.61. The consensus price target is $89.28, implying a potential upside of about 6%. At the current price, Applied Materials stock trades at 17.9 times expected 2021 earnings. The company pays an annual dividend of $0.88 per share (yield of 1.04%). The share price has gained more than 30% for the year to date.


Based in the Netherlands, ASML Holding N.V. (NASDAQ: ASML) also is the largest company by market cap in this group. In its most recent quarterly report, ASML said it shipped 10 Extreme Ultraviolet (EUV) systems and reportedly has received an order for 13 from Taiwan Semiconductor for delivery in 2021. The EUV systems generated about two-thirds of $3.1 billion in total systems revenue in the quarter.

The company’s stock closed at $484.01 on Tuesday, in a 52-week range of $191.25 to $489.45. Analysts have a consensus price target of $424.22, and the shares traded at about 1.1% below the 52-week high. The stock trades at nearly 54 times expected 2021 earnings. ASML pays a dividend yield of 0.59% ($2.85 annually), and its stock price has jumped nearly 58% in 2020.

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