UPDATE: Goldman Sachs Upgrades Applied Materials (AMAT) to Conviction Buy

(Updated - June 24, 2015 8:38 AM EDT)

Goldman Sachs upgraded Applied Materials (NASDAQ: AMAT) from Buy to Conviction Buy. Analyst James Covello is positive on the 3D NAND product cycle, the company's increasing focus on its core businesses, and capital allocation. He also thinks July's SEMICON meeting will be a positive catalyst.

Covello explained, "1) Etch/deposition intensity is increasing: Gartner estimates that Applied generates ~65% of its SSG revenue from etch/deposition tools, and these segments are growing faster than the overall SPE industry due to product cycles such as 3D NAND. Applied’s etch/CVD TAM increases ~120% in the transition from planar to 2nd gen 3D NAND, and in 2014 etch/dep grew as a percentage of WFE for the first time since 2011."

"2) 3D NAND transition is accelerating: Our recent supply chain conversations have added to our confidence that the 3D NAND transition will accelerate in 2H15/2016. Specifically, we believe the 2H15 3D NAND ramp at Samsung will be larger than anticipated, and expect Samsung to have ~90K wspm of 3D NAND capacity by early 2016 vs. initial estimates for ~60K. We estimate that an additional 20-30K wspm could drive $110-$165 mn in revenue for Applied. Further, only 10% of NAND capacity will be on 3D exiting 2015, suggesting a multi-year opportunity. 3) Upside below the top line: We expect EPS upside as management increases focus on the organic business and executes aggressively on its $3 bn repurchase (12% of market cap, now expected to be finished in 2 years vs. prior comments on a 3-year timeline)," added the analyst.

For an analyst ratings summary and ratings history on Applied Materials click here. For more ratings news on Applied Materials click here.

Shares of Applied Materials closed at $19.96 yesterday.

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