Investment Club Presentation

Company: Applied Materials (AMAT) Analyst: Jason Kidwell

Buy Price Target: $47.72 Upside: 19.96%

1 Historically Cheap 2 Industry Leader in R&D 3 Diversified Product Portfolio 4 Positioned for the Future

Notre Dame Investment Club 5 Year Stock Performance CURRENT STOCK PRICE 300% Worries as of 2/2/19: $39.35 surrounding memory prices Performance in the last five 250% prelude the drop in stock price years:

200% AMAT: +135.01%

SMH: +141.77% 150% SPY: +55.06%

100%

50%

0% 2/3/2014 6/3/2014 10/3/2014 2/3/2015 6/3/2015 10/3/2015 2/3/2016 6/3/2016 10/3/2016 2/3/2017 6/3/2017 10/3/2017 2/3/2018 6/3/2018 10/3/2018

-50%

AMAT SMH SPY

Notre Dame Investment Club Industry Overview

Semiconductor Equipment & Machinery Manufacturing Revenue Comparison ($BN) • This industry manufactures equipment used to produce semiconductors and computer chips (ICs) Tokyo Electron

Lam Research Corporation • Growth opportunities in AI, Big Data, and the Internet of Things ASML Holdin N.V. Applied Materials • Constant innovation in the industry rewards those who spend in R&D 0 5 10 15 20 Industry Competitive Forces

Threat of • Capital requirements to install and Threat of • Industry is characterized by rapid integrate new equipment New Entrants: Substitutes: technological change. • Long-term relationships with their LOW HIGH • Success of firms depends on their ability customers. to innovate

Bargaining Power • Most customer transactions involve a high Bargaining Power • Customers have a need to continuously of Suppliers: level of price negotiation of Customers: update their products MEDIUM • Limited buyers and sellers MEDIUM • In transactions there remains a level of negotiation. Notre Dame Investment Club Chip Making Process Overview

Wafer Photolithography Etching Fabrication A layer of photoresist is A pattern of hard material is Silica Sand (base spread across the wafer applied to the wafer material) is purified into Silicon Ingot

Laying Slicing Wafers Packaging Interconnects Chips on wafer tested- Dies are packaged and assume the Wafer is sliced into dies familiar form factor of a desktop Layering and designing processor interconnect- transistors connected Notre Dame = AMAT Point of Production Investment Club Semiconductor Industry Value Chain

Semiconductor Global Semiconductor & Semiconductor & Circuit Equipment and Electrical Product Manufacturers Machinery Manufacturer Manufacturing

Notre Dame Investment Club Company Overview

Applied Materials AMAT Revenue Growth ($MM) • The largest producer of wafer fabrication equipment (WFE), 20,000 18,000 technology, and services to the semiconductor industry 16,000 14,000 • Holds more than 21% of market share in the WFE industry 12,000 CAGR= 14.9% 10,000 8,000 • Has diversified revenue stream in as industry has matured 6,000 4,000 2,000 0 2013 2014 2015 2016 2017 2018 Semiconductor Systems Applied Global Services Display and Adjacent Markets • The largest segment of Applied • Provides solutions to optimize • Fastest growing segment of Materials, generating over 60% of equipment, fab performance, and AMAT, growing at an average of the company’s revenue productivity of customers 39% YOY for the last three years • Manufacturing of equipment used • No single region accounted for in fabricating semiconductor chips more than 30% of Service • Produce equipment used in • Wafers revenue for any of the past three manufacturing used in LCD and • Patterning equipment years OLED displays • Transistor fabrication

Notre Dame Investment Club Corporate Governance and Company Leadership

Board Member Director Since Primary Occupation Independent Name Position Picture Description

Chairman of the Board, Thomas J. Iannotti 2005 Former Senior VP and GM of HP ü • More than 30 years of semiconductor experience Gary E. Gary E. Dickerson 2013 President and CEO of Applied Materials CEO & Dickerson President • 18 years at KLA-Tencor Corporation serving Former Executive VP and CFO of as president and chief operating officer Judy Bruner 2016 SanDisk Corporation ü

Partner of SB Investment Advisors, Eric Chen 2015 former MD of Silver Lake ü • Joined Applied in 2017 from NXP semiconductors where he was executive VP Dan Durn CFO Current Chairman and Co-CEO of and CFO Aart J. de Geus 2007 Synopsys, Inc. ü • Previously served as a VP of technology IB at Goldman Head of the Optoelectronics Stephen R. Forrest 2008 Components and Materials Group at ü the University of Michigan

• Joined Applied Materials, Inc. Alexander A. Karsner 2008 Managing Partner of Emerson Collective ü in 2006 Jay Kerley CIO Adrianna C. Ma 2015 Managing Partner at the Fremont Group ü • Has more than 25 years of industry experience

Scott A. McGregor 2018 Retired President and CEO of Broadcom ü

Retired Executive VP and CFO of Cisco Dennis D. Powell 2007 Systems, Inc ü Notre Dame Investment Club 1 Historically Cheap

Primary Research Comparison of Stock Price and Price/Sales Ratio • Bill Kennedy, Fidelity Research, Worldwide Fund: Portfolio $60 5x Manager $50 4x $40 3x $30 2x $20 • “Price to Sales actually looks quite cheap” $10 1x $0 0x

• “Every cycle gives higher highs and higher lows in operating 2/28/2009 2/28/2010 2/28/2011 2/29/2012 2/28/2013 2/28/2014 2/28/2015 2/29/2016 2/28/2017 2/28/2018 income” Share Price Price to Sales

Why Buy Now? Historical EV/EBITDA Ratio

• Market is too focused on the short term and is forgetting the 20x big picture 18x 16x 14x 12x 10x • The time to buy is when the price is cyclically depressed 8x 6x 4x 2x • Earnings are higher than they’ve ever been 0x 2/12/2014 2/12/2015 2/12/2016 2/12/2017 2/12/2018 2/12/2019

Notre Dame Investment Club 2 Importance of R&D

Forward Looking Spending R&D Expense Comparison ($MM) • Major innovations in the industry require large R&D 2,500 2,019 expenditures by semiconductor companies 2,000 1,804 1,500 1,190 1,000 • As Moore’s Law slows, companies will have to innovate 884 better ways to package computer chips 500 0 2013 2014 2015 2016 2017 2018 • Building the META Center, a new R&D center in New York AMAT Lam Research ASML Tokyo Electron

What Wafer Fab Growth Means Projected WFE Industry Market Size ($BN)

• Increased demand means increased production for AMAT, the 70 market leader in WFE 60 CAGR= 5.7% 50

40

• Driven by the generation of 5G smartphones, server growth, 30 and cloud growth 20

10

0 • In 2019, the industry should still match 2017, a previous all- 2016 2017 2018 2019* 2020* 2021* 2022* 2023* 2024* 2025* time high Notre Dame Investment Club 3 Broad Product Portfolio

A Broadening Product Portfolio Revenue by Segment ($MM) • Semiconductor Systems makes up just over 60% of 20,000 AMAT’s revenue 15,000

10,000

• Display and Service segments growing 5,000

0 2015 2016 2017 2018 • Within Semiconductor Systems, revenue is diversified Semiconductor Systems Applied Global Services Display and Adjacent Markets Corporate and Other

Percent of Revenue from Semiconductor Systems Semiconductor Systems Revenue Breakdown

13% 100% 24% 100% 93% Foundry 90% 80% 70% 70% 63% Dynamic random-access 60% memory (DRAM) 50% Flash memory 40% 30% 36% 20% Logic and other 10% 27% 0% AMAT Lam ASML (2017) Tokyo Electron

Notre Dame Investment Club 4 Trend towards AI, Big Data, and IoT

Broadening Product Portfolio Projected AI Industry Market Size ($MM)

• Artificial Intelligence: The theory and development of computer 120,000

systems able to perform tasks that normally require human 100,000 intelligence 89,847 80,000 70,972

60,000 53,231 • Big Data: The use of extremely large data sets analyzed 37,987 40,000 computationally to reveal patterns, trends, and associations 25,996 17,268 20,000 7,345 11,284 3,222 4,819 0 • Internet of Things: The interconnection of computing devices in 2016 2017 2018 2019* 2020* 2021* 2022* 2023* 2024* 2025* everyday objects, enabling them to send and receive data Applications in the Real World How Applied Fits

• Use of AI and Big Data to revolutionize medical treatment • Building the META Center in NY specifically focused on innovating for the AI-Big Data era

• Use of IoT devices by natural gas companies to monitor leaks • Industry leaders in cobalt products and tools used in photolithography and etching processes in chip making • Using Big Data to make shopping more convenient and advertising more effective • Direct contact with customers in the industry

Notre Dame Investment Club Headwinds

Uncertainty in Asian Markets Location of Customer Facilities in 2018 • Uncertainty in Asian markets is the biggest headwind at the 9% United States moment 5% 30% China • Import restrictions from China extremely unlikely 6% Korea Taiwan

14% Japan • AMAT memory customers have taken a more cautious Europe approach to capital expenditure as they take a wait-and-see Southeast Asia approach 21% 16%

Further Risk Factors AMAT’s Operating Income Cycle ($MM)

• Decreased spending by memory customers 6,000 4,998 5,000 4,530

4,000 • Development of Extreme Ultraviolet Technology (EUV) 3,000 2,159 1,731 1,598 2,000 1,374 1,379 • Chinese customer (JHICC) currently banned from receiving 1,000 US exports 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019* 2020* -1,000

Notre Dame Investment Club Solutions and Tailwinds

Memory Demand Floor Set Semiconductor Fab Projects in 2018 & 2019

Number Manufacturer Segment • With the slowing of Moore’s Law, demand for memory 1 China Foundry equipment now has a floor 2 China Memory (DRAM) 3 China Memory (NAND) 4 GlobalFoundries Foundry 5 Intel Logic 6 Intel Memory (NAND) • The slowdown in miniaturization has led companies to invest 7 Micron Memory (NAND) in facilities, setting up future demand growth 8 Micron Memory (DRAM) 9 Samsung Foundry/Logic 10 Samsung Memory (DRAM) 11 Samsung Memory (NAND) 12 SK Hynix Memory (NAND) 13 SK Hynix Memory (DRAM) 14 SMIC Foundry 15 Toshiba/WDC Memory (NAND) 16 TSMC Foundry 17 UMC Foundry Growth in OLED Projection of OLED Industry Market ($BN)

50 • Offers better picture quality and image contrast than 44 traditional LCD or LED screens 45 CAGR= 4.9% 40 40 37 33 35 30 30 26 • Applied is developing equipment used in all OLED screens 25 23 and for flexible substrates 20 17 15 10 5 0 • Companies using OLED include Apple, Samsung, and Sony 2016 2017 2018 2019* 2020* 2021* 2022* 2023*

Notre Dame Investment Club Final Recommendation

Share Price as of Feb. 10, 2019: $39.78

Downside Case Base Case Upside Case

Price Target: $38.36 Price Target: $47.72 Price Target: $53.20 Downside: -3.57% Upside: 19.96% Upside: 33.74%

Recommendation Applied Materials is trading at historically cheap values because the market is not thinking of the company’s long term opportunities. Therefore, I am recommending Applied Materials (AMAT) as a buy with a 19.96% upside at this point in time.

Notre Dame Investment Club Notre Dame Investment Club Appendix

Notre Dame Investment Club Valuation - Comparable Companies Analysis

Notre Dame Investment Club Valuation - WACC

Notre Dame Investment Club Valuation – DCF(Base)

Notre Dame Investment Club Valuation – DCF(Base)

Notre Dame Investment Club Valuation – DCF(Upside)

Notre Dame Investment Club Valuation – DCF(Upside)

Notre Dame Investment Club Valuation – DCF(Downside)

Notre Dame Investment Club Valuation – DCF(Downside)

Notre Dame Investment Club