Applied Materials‘ stock price has surged by approximately 45% in 2016, outperforming the 13% gain posted by the PHLX Semiconductor Index (the so-called SOX) during the same period. The strong rally in Applied’s stock is despite a forecast of a 2% decline in the capital equipment spending by Gartner. We attribute the surge in Applied’s stock to the following factors:
Strong growth expected in the near term: The company is expected to experience strong growth in the coming quarters as its key customers — Samsung, Taiwan Semiconductor and Intel — are expected to ramp up their capital expenditure in the current fiscal year. Because of this, Applied should witness higher orders and revenues.
Major technology inflections expected soon: As major technology inflections such as the transitions to 3D NAND memory and 10-nanometer process technologies come into play, competition is expected to intensify among the top semiconductor manufacturers. In an effort to maintain their market share, semiconductor manufacturers will have to increase their capital spending to advance their manufacturing capacity to implement the latest technologies. The following factors point out the same:
Both Intel and Taiwan Semiconductor are allocating significant investments towards developing 10nm manufacturing facilities in 2016. Samsung is likely pursuing an aggressive strategy to get more semiconductor orders to offset the slowdown in its smartphone business.
Intel and Micron together have beefed up their efforts to start the mass production of 3D-NAND flash products. Their production capacity is expected to increase significantly with the start of Dalian plant in China.

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