Applied Materials

We are providing an update on Besi after the stock fell 10% on Oct. 7.

The bottom line: We maintain our EUR 265 fair value estimate per share and wide Morningstar Economic Moat Rating for Besi. The shares are under pressure from two concerns: the timing of hybrid bonding, or HB, adoption in high-bandwidth-memory, or HBM, and the prospect of ASML becoming a competitor in HB. We see the former as more important than the latter.

The big picture: The roadmaps for hybrid bonding adoption in HBM continue shifting and the timing of adoption remains the key uncertainty for Besi’s medium-term earnings. Our EUR 265 fair value estimate is more conservative than Besi’s midcase investor day scenario until 2030. Our base case implies HB would get limited adoption in HBM4e and adoption would only increase with the launch of HBM5 toward 2030. At the same time, adoption across the logic and co-packaged optics roadmaps has strengthened, with TSMC ramping up SoIC capacity and TSMC’s Coupe roadmap also strengthening. This could compensate for delays in HBM adoption.

On ASML, we think the market is overstating the risk that ASML will become a major die-to-wafer, or D2W, hybrid bonding competitor to Besi. While ASML is clearly investing in bonding technology as supported by several patent applications, we don’t yet see enough evidence that it is preparing to launch a direct substitute for Besi’s D2W bonder. The filings we have reviewed span several areas: metrology around the bonding process, process-flow architecture and, importantly, bonding hardware itself, which would be a more direct threat. The filings mention areas that are relevant to D2W, like die transfer and release, positioning or alignment during bonding—but also emphasize wafer-to-wafer bonding, a process where Besi does not compete (Besi’s bonders are D2W). The key uncertainty is if ASML could turn this research and development into a successful tool and compete head-on with Besi.

Besi has been developing HB for a decade, with an installed base in the hundreds and its technology integrated with Applied Materials through the Kinex platform. In semiconductor equipment, fab-level process data and iterative learning are major advantages, and while a newcomer may design an excellent machine, yield, uptime, and process robustness are obtained through extensive manufacturing collaboration. Besi is also pushing to increase the output of its HB machines and reduce customers’ total cost of ownership, aiming for and output of 5,000 units per hour in the medium term versus 3,000 currently. ASML is a formidable company, but entering a small equipment niche with entrenched incumbents would not be trivial.

A HB platform does not only require the bonder, but also wet cleaning, plasma activation, degasification, and metrology, which are all tightly optimized with each other. Besi already benefits from this integration, while ASML would need to partner for these adjacent modules and qualify the whole system. ASML's final intentions are unclear, but ASML could also build advanced-packaging capabilities in other areas where its strengths lie, such as wafer handling, alignment, overlay, or precision motion.

We estimate the D2W bonder market could reach EUR 1.0 billion-EUR 2.5 billion by 2030, depending on adoption scenarios. While this is highly material for Besi, it’s almost irrelevant for ASML, which we estimate will generate close to EUR 90 billion in 2030 revenue. If ASML would decide D2W bonders are strategically essential, acquiring Besi for EUR 14 billion would be a more efficient route of entering the market than recreating the technology, installed base, and ecosystem, although an acquisition would likely trigger regulatory scrutiny.

ASML could provide more information about its advanced packaging aspirations at its investor day in June 2027.

Our fair value estimate is $520 per share. Our valuation implies a fiscal 2026 adjusted price/earnings multiple of 42 times and a fiscal 2026 enterprise value/sales multiple of 11 times. Against fiscal 2027 and 2028 non-GAAP earnings, our valuation implies multiples of 30 times and 23 times, respectively. The biggest drivers to our valuation are the growth of wafer fab equipment spending and Applied Materials' ability to increase market share.

We forecast 19% compound annual sales growth for Applied Materials through fiscal 2030. We project superb growth through 2028, driven by robust capacity expansions at both logic and memory chipmakers to supply AI demand. Thereafter, we project growth tapering towards our longer-term midcycle expectations in the high single digits, in line with the historical trend of the WFE market, along with some long-term AI upside. We expect midcycle growth to be driven by more advanced chip designs at chipmakers that rely on Applied Materials' equipment to manufacture gate-all-around transistors, chiplet designs, and high-bandwidth memory, among other technologies. Applied Materials' system sales are the most cyclical, and its services business is quite stable, which helps offset some cyclicality on the top line. We expect this services revenue stream to rise in the mid-teens annually over our forecast.

We project Applied Materials to maintain its non-GAAP gross margin close to 50%, with modest shorter-term fluctuations due to product mix and volumes. This margin level is higher than historically, which we attribute to a higher mix of systems sales for AI buildouts. We project operating margin to rise meaningfully in the next three years, with rapidly expanding volumes supporting AI chip supply builds. We estimate 38% non-GAAP operating margin in fiscal 2030, up from 30% in fiscal 2025.

We assign Applied Materials a wide economic moat rating on the basis of intangible assets and switching costs. Applied Materials' proficiency in wafer fabrication equipment is the result of topnotch design expertise, in our view, and we think its embedded services business and long-term customer roadmaps are sticky. We also believe the amount of investment required to remain at the forefront of leading chip development, particularly across so many subsections of the market, creates an immense barrier to entry to all but the largest and best-capitalized chip equipment manufacturers. We expect Applied Materials to earn returns on invested capital well above its cost of capital, more likely than not, for the next 20 years.

We see Applied Materials holding the most comprehensive portfolio of equipment for semiconductor manufacturing. Its product lines run the gamut of chip manufacturing, able to serve logic and memory chipmakers alike with cutting-edge equipment, and offerings in nearly every category that span the cost and capability spectrum. While many other WFE peers occupy one or two corners of the market (like Lam with etch and deposition and KLA with process control), Applied Materials plays in them all in a meaningful way. The only exception is lithography, where ASML has a vise grip.

Deposition makes up roughly one fourth of the total WFE market, and Applied Materials' 40%-plus share more than doubles that of its nearest competitor. In etch and process control, Applied Materials holds third- and second-place share, respectively, and is the only player above 10% share in all three of these markets. Applied Materials also dominates smaller subsections of WFE, such as thermal processing and doping (the intentional introduction of impurities into an intrinsic semiconductor for the purpose of modulating its electrical, optical, and structural properties). To us, these strong share positions are the result of unmatched portfolio breadth and depth, fed by a market-leading $3 billion annual R&D budget. This budget dwarfs all but the largest of WFE competitors and enables Applied Materials to continue building its immense base of intangible assets. The strength of its offerings helps the company generate healthy non-GAAP gross margins in the mid- to high 40s.

Applied Materials' broad and deep portfolio helps it win customers, and we see it embedding customers once installed. Chipmaking is extremely complicated and precise. Applied Materials' equipment is responsible for creating transistors more than a thousand times smaller than a human hair and packing trillions of them into a 12-inch diameter wafer, with minimal defects. Customers demand the ability to produce millions of these wafers a month. Development and manufacturing to this level of precision is calibrated to specific customer product lines, and chipmakers build workflows around their equipment with the singular goal of efficient production. Applied Materials sends on-site service engineers to customer fabs to operate as an extension of the chipmaker's engineering team. These service engineers help to calibrate equipment during R&D, tweak and fix bugs during production, and work with chipmakers on meeting manufacturing requirements. They also work on equipment upgrades or recalibration to repurpose equipment. The high complexity of WFE machines and the integration of Applied Materials' service engineers make the company hard to replace, in our view.

Beyond the cost of purchasing new equipment ($1 million or more per machine), chipmakers would need to redesign manufacturing workflows and learn wholesale new hardware and software interfaces, as well as restart knowledge sharing with new services engineers. Applied Materials' equipment can last in the field for multiple decades, which generates deep connections with customer engineering teams and augments this stickiness. Applied Materials' deep customer relationships also entail forward-looking project roadmaps up to 10 years out, giving the firm a leg up in winning new placements as it can target new machines to exact customer requirements. Finally, with its broadest-in-class portfolio, Applied Materials increasingly sells integrated solutions to customers, sometimes combining seven different process steps and chambers in one unified piece of equipment. This can offer better performance, cost, and development time to chipmakers and also makes Applied Materials' equipment even stickier, in our view.

The combination of Applied Materials' large portfolio, sticky customer relationships, and immense ongoing investment gives us confidence in the durability of its competitive position and healthy profitability. We believe this will allow the company to continue earning strong economic profits, more likely than not, for the next 20 years and results in a wide economic moat.

Applied Materials is the largest WFE provider in the world, with the broadest portfolio and the largest R&D budget of its peers.

We expect Applied Materials to benefit from drivers of chip complexity like gate-all-around transistors and advanced packaging.

Applied Materials has strong profit margins and cash flow and sends most of its cash flow back to shareholders.

We consider Applied Materials to be a generalist in WFE. More-specialized firms like Lam Research and KLA could outcompete it in their respective markets.

Applied Materials faces cyclicality in the semiconductor market that can lead to years with lower sales and margin compression.

Applied Materials faces risk from geopolitical tensions between the US and China that may further inhibit its ability to ship to Chinese chipmakers.