Applied Materials (AMAT): Semiconductor Supply Chain Made In USA

Why Semiconductors Are the New ‘Oil’ of the Digital Economy

Nearly every electronic device today utilizes some semiconductor components. From washing machines to cars to computers and phones, virtually every manufactured device or machine contains a chip or an electronic board of some sort.

This makes semiconductors one of the most important supplies in the modern economy. And a strategic concern for great powers. The semiconductor market grew in successive waves, pushed first by computers, then the Internet, then the Cloud & smartphones, and now AI and IoT (Internet of Things).

Source: Applied Materials

One way to invest in the semiconductor industry is with companies producing the chips, like TSMC (TSM -2.55%) or Intel (INTC -3.36%) (follow the links for a detailed report on each of these companies).

Another way is to invest in the company providing the equipment, materials, and machinery to the semiconductor foundries, which rely on specialized suppliers, able to provide the best and most reliable equipment to produce at-scale chips and other semiconductors.

Because semiconductor manufacturing is such an exact science, chip producers want only the best tools available. And because it is such a complex endeavor, this can only be achieved by a handful of very specialized suppliers.

As a result, a complex ecosystem emerged, with each task in the process of making a chip being achieved by ultra-specialized companies.

Source: Generative Value

This gives these suppliers great pricing power and a strong economic moat. Companies like TSMC will stick to their established suppliers or risk disrupting their operations.

It also creates a positive flywheel where existing sales generate money for more R&D, which in turn guarantees that any potential new competitor would struggle to achieve the same technical results.

So, with semiconductors becoming a strategic asset, it can make sense to invest in equipment suppliers, as they will benefit from chip foundries’ build-up, no matter which chip maker (TSMC, Nvidia, Intel, etc.) ultimately benefits the most from growing semiconductor demand.

Among the largest semiconductor equipment companies is ASML (ASML -0.9%), with its monopoly on EUV (Extreme UltraViolet) lithography, and another company whose equipment is present in many other steps of the chips & other semiconductors manufacturing process: Applied Materials.

Source: Tech Insights

Applied Materials (AMAT) at a Glance

Applied Materials has been at the center of innovation in semiconductor manufacturing since its foundation in 1967 and its public listing in 1971.

It is still headquartered in Silicon Valley to this day, and is the largest US manufacturer of semiconductor equipment, an enviable position as the country is looking to relocalize domestically its semiconductor supply chain. To answer this growing demand, it invested as much as $600M in new US-based facilities in the past 5 years.

Source: Applied Materials

Applied Materials was one of the first American semiconductor companies to internationalize, notably by opening a technology center in Japan in 1984 and being the first company to open a technology center in China.

The company employs around 35,700 people in 24 countries and 207 cities. The company did $27.18B revenue and ~$7.18B GAAP net income.

It holds no less than 22,000 patents, stemming from more than $3.2B in R&D investments in 2024 alone.

Applied Materials’ core expertise is in modifying materials at the atomic level and on an industrial scale with consistent quality, illustrated by the company’s motto:

Building a Better Future—One Atom at a Time

It initially started by selling chemicals to the nascent semiconductor industry, and then progressively added more and more advanced and complex machinery to its offering, starting in 1987 with a chemical vapor deposition (CVD) machine called the Precision 5000.

Applied Materials’ modern machine line-up includes a myriad of products supporting the manufacturing of semiconductors.

Most will be hard to fully understand for non-engineers, for example, “Metal and oxide barrier films,” “Color shifting and holographic films,” or “In-chamber patterned metal layers.” But they are crucial tools for semiconductor production specialists, with many having little to no serious competition (at least for now, see below the section on China’s semiconductor supply chain).

Source: Applied Materials

Applied Materials Business Model

While the sales of machinery and tools are the core of the company, a lot of its revenues are actually recurring, around 60% of total revenues.

This is because these very precise machines need a lot of maintenance, consumables, repairs, etc. On average, these contracts last 2.6 years and are renewed in more than 90% of cases, reflecting the stability of the company’s sales once a contract is won.

Applied Materials will also provide services and assistance for the setting up of new semiconductor foundries or the upgrade of existing ones. So, as the reference expert, it might have a strong influence over the final design of a foundry.

This also gives the company a unique advantage in terms of R&D and sales, as it provides it with a deep knowledge of its customers’ technical challenges, needs, and long-term strategic objectives.

Applied Materials Segments

The company split its activities into 3 segments: semiconductor systems, global services, and displays. By far the most important segment is semiconductor systems, responsible for the bulk of the company’s revenues.

Source: Applied Materials

Swipe to scroll →

Semiconductor Systems

Applied Materials tools are present at almost every step, starting from the creation of a silicon wafer, and turning it into dozens of advanced chips, memories, etc.

Source: Applied Materials

These steps include:

• Material Deposition: the creation of thin films of very pure materials like silicon nitride, conductors such as copper and tungsten, and compounds, such as ferromagnetic material.
  • These precursor materials are deposited precisely by controlling variables such as temperature, pressure, electrical and magnetic fields, plasma, flow rate, and time.
• Material Removal: Selective removal of targeted atoms needs to be precise to not damage the semiconductor wafer. It uses radical-based chemistries to remove a target material without damaging surrounding materials, and can work even when there is no line of sight.
• Material Modifications: The now properly-shaped material still needs to be fully functional. It can require heating, cooling, ion bombardment and injection, chemical treatments, and Ion implantation (also called doping).
• Analysis: Once the semiconductor part is produced according to the established protocol, it is still important to check that everything went as planned. So it is important to scan wafers at high speed to identify potential particles, pattern flaws, and other problems.
• Connections: Once the chips are done and confirmed functional, they need to be “packaged”. This connects the chip to the rest of the system, helps dissipate heat, and helps protect it from physical damage and environmental threats, including moisture, humidity, and radiation.

Source: Applied Materials

PPCAt

The current focus of Applied Materials in semiconductor manufacturing is the so-called “PPACt playbook” (Power, Performance, Area, Cost, Time to Market).

The core idea is that Moore’s Law, the idea that chips double in capacity every 2 years, is slowing down.

Source: The Economist

So the industry needs new ways to increase chip performance. In addition, increasing chip performance while lowering power consumption is a growing challenge, as power generation becomes as much an issue as advanced chips for the latest AI applications.

“AI’s natural limit is electricity, not chips. The U.S. alone may need an additional 92 gigawatts of power to sustain its AI ambitions—a demand equivalent to building 92 nuclear power plants.

For perspective, only two such plants have been constructed in the U.S. over the past three decades.

Eric Schmidt – Former Google CEO

So managing both to keep increasing performance and power consumption is an important factor.

“Area” and “Cost” are the other two important technical factors, with physical space to cram all the required transistors, sensors, and power supply becoming an issue at the nanoscale, at least in a cost-effective manner, so that production can be scaled up and profitable.

Lastly, the ability to rapidly deploy these new solutions is also important (Time to Market). The quicker setup of new production lines and deployment of new & more advanced designs can be worth billions of dollars to Applied Materials’ customers.

Lastly, reducing the environmental impact of semiconductor manufacturing is also important, and makes an additional sales point for the company.

All newly manufactured parts are engineered for greater repairability, and we use refurbished parts whenever possible for repair and remanufacture, contributing to sustainability and cost-effectiveness.

Global Services

This segment uses Applied’s Actionable Insight Accelerator (AI^x) to provide advanced solutions to its customers to optimize technology transfer, ramp, and device performance.

In essence, Applied Materials works here as a consultant and expert advising semiconductor foundries on how best to achieve their objective.

This segment also includes “supply chain solutions“, which deliver certified and cleaned parts for maintenance and minimize machine downtime by placing parts close to customer fabs.

This consulting can be integrated with the company’s smart factory solution, with AI-powered automation, advanced scheduling technologies, improving productivity on almost all metrics: yield, risks, defects, equipment downtime, higher throughput, improved cycle time, etc.

Source: Applied Materials

Displays

Applied Materials is also providing the machine for the production of OLED (organic light-emitting diode) displays (screens, TVs, etc.), the MAX OLED Solution.

Source: Applied Materials

By bringing OLED technology to larger screens of TVs, tablets, and PCs, the final result is superior to other display technologies.

This proprietary manufacturing method enables excellent pixel placement accuracy, more than doubling the aperture ratio. The result is larger displays with up to 3X higher brightness and resolution up to 2,000 pixels per square inch.

The MAX OLED solution also reduces display power consumption by up to 30% and delivers up to a 5X increase in display lifetime.

R&D and the EPIC Center

Applied Materials’ success is built on its technical excellence and expertise, fueled by decades of R&D to push further what is possible in the manufacturing of electronics.

A major contributor to R&D effort in the future will be the new EPIC Center (Equipment and Process Innovation and Commercialization), expected to begin operations in spring 2026.

Source: Applied Materials

This will be the world’s largest and most advanced facility for collaborative semiconductor process technology and manufacturing equipment R&D, located at the Applied campus in Silicon Valley.

The multibillion-dollar facility is designed to provide a unique breadth and scale of capabilities with more than 180,000 square feet of state-of-the-art cleanroom for collaborative innovation with chipmakers, universities, and ecosystem partners.

The goal is to radically speed up the move from academic discovery to industrial deployment of new technology, shortening the process by several years.

Applied Venture

Besides internal R&D effort, Applied Materials is also investing in promising startups and technology through its Applied Venture brand.

This VC segment invests around $100M per year, and has to date provided funding to 90+ companies in 19 countries, of which 10+ have already IPOed.

The focus of the investment is advanced manufacturing (3D printing, robotics, automation), advanced materials, AI & big data, energy technologies (batteries, solar, thermoelectrics, water), life sciences, semiconductor tech, and displays.

Geopolitics, Export Controls, and China Risk

For all semiconductor foundries and equipment manufacturers, the geopolitical tensions between China and the USA are a threat.

The immediate consequence is the impossibility of selling to China the most advanced equipment, as the US generally blocks exports of these machines containing American IPs to its arch-rival, in a bid to undermine the local semiconductor industry and AI research.

This also means that China is pouring hundreds of billions of dollars in subsidies, preferential purchases, and other supports into its domestic industry. This includes chip foundries, but even more the creation of alternatives to companies like ASML, Applied Materials, or Lam Research, whose machines are the keystone of semiconductor manufacturing.

In the long run (5-10 years), these efforts could pose a threat to the company if they succeed:

• The business lost with Chinese foundries is likely lost forever.
• Chips from new foundries using domestic technologies might compete with international/Western foundries, reducing the demand for Applied Materials equipment.
• Countries allied to China (Russia, for example) or neutral (most of South-East Asia) might deploy Chinese thin-film deposit machines or other equipment instead of Applied Research’s machines in their future new foundries.

While serious, this risk should not be overstated.

Firstly, the efforts to duplicate the entire tech stack, IPs, and technical expertise of the Western-led semiconductor industry are a colossal endeavor. So while it will likely somewhat succeed, it will still take time to just catch up to an ecosystem that took more than 60 years to build, and is still innovating quickly.

Secondly, the breadth of Applied Materials is another protection. So while a breakthrough in EUV could spell trouble for a single-tech company like ASML, Applied Materials is likely to still lead in many technologies in 10-20 years, making it still the best choice for all foundries in neutral countries.

Lastly, the scale of Applied Materials’ installed base means more cash flow for R&D and winning an eventual price war with Chinese competitors. So even if the company’s technology is no longer unique, it is far from certain that its long-established commercial advantage will not prove to be a sufficient moat for foundries out of China.

Financials: Growth, Margins, Capital Returns

Applied Materials’ revenue growth is mostly driven by the semiconductor segment, although this might, in the long run, lead to growth in the service segment as well.

Operating margins have been overall stable in the main segments, and growing in the display segment.

Source: Applied Materials

The company has been increasing its dividends consistently over the years, with a net acceleration in 2018, and the 2024 dividends are almost 5x compared to 2017’s levels.

Source: Applied Materials

The company is also repurchasing shares, having reduced the share outstanding since 2014.

Source: Applied Materials

Conclusion

Applied Materials is an essential company in the global semiconductor ecosystem, with key machines present at every step of the process of turning sand (silicon) into complex engraving at the nanoscale that forms advanced computer chips.

The company is going to benefit from several long-term trends like the re-localization of semiconductor production in the USA, increased demand from AI and IoT, and the global tendency of increased digitalization and electrification.

It is also ultimately well-positioned to handle competitive threats, including from emerging Chinese competitors propped up by subsidies and China’s national strategic interest.

Latest Applied Materials (AMAT) Stock News and Developments