Applied Materials' Solar View Less Shiny
Applied Materials (AMAT: NNM)
By Credit Suisse ($20.89, April 6, 2008)
WE ARE DOWNGRADING Applied Materials from Outperform to Neutral.
We were early identifying the positives for Applied Materials' solar (Sunfab) when we stuck with our Outperform rating on Applied Materials despite our sector downgrade a year ago.
The stock is now trading purely on solar, and Applied Materials has outperformed the Nasdaq 35% year-to-date. Sum-of-the-parts valuation suggests solar is embedding a rich $7.7 billion ($5.50 per share) valuation.
Three reasons why we're downgrading now:
Recent checks suggest teething issues are cropping up handling Gen 8.5 glass (added weight/cost), contrasting with Applied Materials' claims. Applied Materials' customers may cut Gen 8.5 to smaller Gen 5 for the next 12-18 months; even the competition is rapidly consolidating around smaller panels.
Economics are misaligned with market requirements. Sunfab's $3-per-watt capital-expenditure-costs are too high relative to $1-per-watt market requirements; difficult to optimize both efficiency and capital expenditures simultaneously for tandem. Sunfab's targeted panel-cost of about $1.00 per watt by 2010 is inadequate given the oversupply we expect in solar by 2010 – best in class crystalline silicon Chinese companies can make 50%-200% more efficient panels than Applied Materials at less than $1 per watt panel-cost today. Applied Materials' customers are better off pursuing scale with c-Si (crystalline silicon) than Sunfab.
Shipments are strong, but magnifies risks. Seven customers now have Sunfab (Signet, T-Solar, Sunfilm, Green Energy, Xin-Ao, Best Solar), and over a dozen lines (about 800 megawatts) may ship in calendar 2008; 2 gigawatt pipeline exists for calendar 2009. At $2 per watt, the math is alluring but issues are: (i) Financing challenges, lack of differentiation for Applied Materials customers; (ii) Sunfab's widespread deployment guaranteeing efficiency, yield and cost is risky given untested product; (iii) Customers have little solar experience. Applied Materials may scale operating expenditures (margin issues); repeat business and cash-collection potential issue from cash-starved customers.
