Better Semiconductor Stock: Applied Materials vs. Veeco Instruments

Applied Materials, Inc. (AMAT) and Veeco Instruments, Inc. (VECO) are two prominent players in the semiconductor industry. AMAT provides material engineering solutions for semiconductor chips to electronic manufacturers of flat panel displays, solar photovoltaic cells, and modules. The company also supplies equipment to produce coatings for flexible electronics, packaging, and other applications. In comparison, VECO provides process equipment solutions to support the production of high-tech microelectronic devices such as LEDs, power electronics, HDDs, MEMS, wireless devices, and semiconductors worldwide. It serves customers in the HB-LED, solar, data storage, semiconductor, scientific research, and industrial markets.

Despite the global chip shortage, the semiconductor industry delivered a 26.8% year-over-year sales growth in January 2022. As 70% of the neon, a major component used to operate industrial lasers in the semiconductor manufacturing process, comes from Ukraine, the chip shortage is expected to last longer.

However, rising corporate and government investments to ramp up production should help ease the shortage in the near term. Also, companies are adopting emerging technologies to ramp up production and invent efficient chips that drive the performance of devices. Investor interest in this space is evident from the SPDR S&P Semiconductor ETF’s (XSD) 6.8% gains over the past nine months. The global semiconductor chip industry is expected to reach $600 billion in 2022. Therefore, AMAT and VECO should benefit.

While AMAT lost 7.1% over the past month, VECO gained 21.3%. VECO is a clear winner with 35.1% gains versus AMAT’s 17.5% over the past year. But which of these stocks is a better pick now? Let’s find out.

Latest Developments

On December 23, 2021, AMAT and the Institute of Microelectronics (IME), a research institute of Singapore’s Agency for Science, Technology, and Research (A*STAR), announced a new phase of their research collaboration at the Center of Excellence in Advanced Packaging in Singapore. As chipmakers and systems companies demand heterogeneous design and advanced packaging solutions, the offering of heterogeneous chip integration with hybrid bonding technology and other emerging technologies will help meet the demand for reduced wiring distances, increased I/O density, improved power efficiency, and greater efficiency system performance.

Click here to checkout our Semiconductor Industry Report for 2022

On February 16, 2022, multiple leading semiconductor manufacturers placed repeat, multi-system orders for VECO’s LSA101 and LSA201 Laser Annealing Systems. In addition, a leading-edge logic customer designated VECO’s LSA system platform as their production tool of record for high-volume manufacturing. Amid a global chip shortage, as foundries and IDMs are forced to ramp capacity to meet growing demand from various industries, the adoption of VECO’s laser annealing advantage will help broaden scalability and adaptability and enhance high-volume chip production.

Recent Financial Results

AMAT’s net sales for its fiscal 2022 second quarter ended January 30, 2022, increased 21.5% year-over-year to $6.27 billion. The company’s non-GAAP gross profit came in at $2.97 billion, indicating a 25.2% year-over-year improvement. Its non-GAAP operating income came in at $1.99 billion, up 32.7% from the prior-year period. While its non-GAAP net income increased 32.3% year-over-year to $1.70 billion, its non-GAAP EPS grew 36% to $1.89. As of January 30, 2022, the company had $5.26 billion in cash and cash equivalents.

For its fiscal 2021 fourth quarter ended December 31, 2021, VECO’s net sales increased 10.1% year-over-year to $152.97 million. The company’s non-GAAP gross profit came in at $64.87 million, representing a 13.1% rise from the prior-year period. Its non-GAAP operating income came in at $24.89 million, representing a 41.2% year-over-year rise. VECO’s non-GAAP net income came in at $22.64 million, up 51.4% from the prior-year period. Its non-GAAP EPS came in at $0.43, up 43.3% from the year-ago period. The company had $119.75 million in cash and cash equivalents as of December 31, 2021.

Past and Expected Financial Performance

AMAT’s revenue and tangible book value have increased at CAGRs of 14.2% and 21.5%, respectively, over the past three years.

AMAT’s EPS is expected to grow 19.2% year-over-year in fiscal 2022, ending October 31, 2022, and 15.1% in fiscal 2023. Its revenue is expected to grow 15.1% year-over-year in fiscal 2022 and 10.2% in fiscal 2023. Analysts expect the company’s EPS to grow at a 16.5% rate per annum over the next five years.

In comparison, VECO’s revenue and tangible book value have increased at CAGRs of 2.5% and 9.6%, respectively, over the past three years.

Analysts expect VECO’s EPS to rise 11.9% year-over-year in its fiscal year 2022, ending December 31, 2022, and 21.9% in fiscal 2023. Its revenue is expected to increase 13.6% year-over-year in fiscal 2022 and 12.3% in fiscal 2023. The company’s EPS is expected to grow at a 91% rate per annum over the next five years.

Valuation

In terms of non-GAAP forward P/E, VECO is currently trading at 17.44x, 14.3% higher than AMAT’s 15.26x. In terms of forward EV/EBITDA, AMAT’s 11.99x compares with VECO’s 12.51x.

Profitability

AMAT’s trailing-12-month revenue is almost 41.4 times VECO’s. AMAT is also more profitable, with a 33.8% EBITDA margin versus VECO’s 14.3%.

Furthermore, AMAT’s ROE, ROA, and ROTC of 56.1%, 19.9%, and 27.9% compare with VECO’s 6.2%, 4%, and 4.9%, respectively.

POWR Ratings

While AMAT has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, VECO has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

Both AMAT and VECO have a B grade for Momentum, reflecting their impressive price gains over the past year. AMAT delivered 17.5% returns over the past year, while VECO gained 35.1%.

AMAT has a B grade for Quality, consistent with their higher-than-industry profitability ratios. AMAT’s 17.4% trailing-12-month levered free cash flow margin is 67.3% higher than the 10.4% industry average. VECO’s D grade for Quality is in sync with its lower-than-industry profit margins. VECO’s 0.5% trailing-12-month levered free cash flow margin is 95.2% lower than the 10.4% industry average.

Of the 97 stocks in the B-rated Semiconductor & Wireless Chip industry, AMAT is ranked #43, while VECO is ranked #68.

Beyond what we have stated above, our POWR Ratings system has also rated AMAT and VECO for Stability, Sentiment, Value, and Growth. Get all AMAT ratings here. Also, click here to see the additional POWR Ratings for VECO.

The Winner

Given the rising need for semiconductor chips from various industries and increasing capital inflows in the industry, both AMAT and VECO are well-positioned to benefit. However, a higher profit margin and lower valuation should allow AMAT to perform better than VECO.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Semiconductor & Wireless Chip industry.

AMAT shares were trading at $128.20 per share on Wednesday afternoon, up $4.05 (+3.26%). Year-to-date, AMAT has declined -18.38%, versus a -10.13% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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