What does Applied Materials’ forecast say about chip demand?

• Applied Materials gave a strong sales forecast for the current quarter, backed by improved demand for gear that makes auto and industrial chips, indicating that there are still bright spots in the chip industry.
• CEO Gary Dickerson said customers are adding more capacity to keep up with demand, and he believes the company is positioned to outperform the market in 2023.
• Data from the Semiconductor Industry Association indicates that the industry is simply in its typical cycle, and demand will only get better.

The biggest maker of semiconductor-manufacturing equipment, Applied Materials, recently announced its sales forecast for the current quarter. Despite the fact that many of its largest customers are slashing their budgets for new plants and equipment this year, the American chip equipment maker gave a strong sales outlook for the quarter – one that is higher than analysts’ estimates.

The average analyst estimate is US$6.3 billion, and Applied Materials said its second-quarter sales would be about US$6.4 billion, according to Bloomberg. The company forecasts that it will benefit from demand, especially for gear that makes auto and industrial chips. But the overall sentiment of America’s biggest chip gear maker suggests that there are still bright spots in the chip industry, especially automotive semiconductors.

“While such products are typically built on older machinery, customers are adding more capacity to keep up with demand,” CEO Gary Dickerson said in an interview. He reckons people have underestimated the strength of this business. “We’re positioned to outperform the market in 2023. We’re more resilient,” Dickerson reiterated.

In contrast, chipmakers like Analog Devices Inc. and GlobalFoundries Inc. have indicated that there are still shortages of some semiconductors, particularly those used in vehicles, factory equipment, and smart, internet-connected appliances. Then there’s Taiwan Semiconductor Manufacturing Co., which has said it will have to build out its capacity to produce such parts.

Does Applied Material’s optimism make sense?

To give an idea of how the industry has been performing, global semiconductor sales data released earlier this month showed that the industry experienced significant ups and downs in 2022. While chip sales reached the highest-ever annual total in 2022, the slowdown in the second half of the year substantially limited growth.

But as the Semiconductor Industry Association’s (SIA) Director of Industry Statistics and Economic Policy, Robert Casanova, puts it, “In the current cycle, after a brief downturn in early 2020 at the start of the pandemic, the semiconductor industry experienced a period of tremendous growth, and now it is on a significant downward trend that started in the second half of 2022.”

He noted that a deeper dive into the year-end data reveals how this pattern is consistent with the semiconductor industry’s predictable cycle. Casanova shared that the current short-term downturn does not change the reality that long-term growth prospects for this foundational technology remain very promising.

Indeed, Applied Materials understands how macroeconomic headwinds have created significant short-term challenges for the semiconductor industry, resulting in weaker industry growth in 2022 than was previously expected. But the company is also aware that short-term adjustments do not change the structural drivers of industry growth that are expected to reassert themselves and propel continued growth over the long term.

“The net of this is that semiconductor demand will grow over the long term as chips continue to make the world smarter, more efficient, and better connected,” Casanova noted.

Chip demand is here to stay

Based on SIA’s analysis, the semiconductor industry has shown consistent growth when looking at more than short-term demand fluctuations at the long-term trend over the last two decades. Annual sales grew from US$139 billion in 2001 to US$573.5 billion in 2022, an increase of 313%. Over this same period, unit sales of semiconductors increased by 290%, reflecting the increased demand for semiconductors throughout the economy.

A 2020 study by SIA and the Boston Consulting Group found that global demand for semiconductor manufacturing capacity is projected to increase by 56% by 2030. “As this long-term trend continues in the years ahead, and demand for chips rises, semiconductor companies will need to invest in more research, design, and manufacturing. The question is not whether more chip manufacturing facilities or fabs will be built but rather where they will be built,” Casanova concluded.

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