What’s Happening With Applied Materials Stock?
Applied Materials (NASDAQ:AMAT) published a better-than-expected set of Q3 results last week, but the stock has fallen about 15% since the earnings report amid concerns over future demand, particularly from China. While Applied is positioned to benefit from a higher mix of advanced equipment tied to generative AI and next-gen process technologies, geopolitics appears to be playing spoilsport.
Earnings Beat, Weak Guidance
For Q3, Applied’s revenue stood at $7.30 billion, up 7.7% year-over-year, with adjusted EPS of $2.48, both of which came in ahead of expectations. Despite this strong showing, the outlook for Q4 (October fiscal year) was notably weaker. The company guided revenue to about $6.70 billion at the midpoint, well below the $7.30 billion consensus, while earnings were forecast at $2.11 at the midpoint, also lower than analyst estimates. Management attributed this decline primarily to softer demand for leading-edge logic equipment from China, a market that has been under pressure from both investment slowdowns and regulatory uncertainty. By contrast, DRAM demand remains resilient and could reach record levels, highlighting the unevenness across different segments of the semiconductor industry.
China’s outsized importance to Applied remains a key risk. The region accounted for 35% of revenue last quarter, far ahead of the 9% contribution from the U.S., underscoring how dependent Applied is on Chinese customers. This leaves the company exposed not only to shifting customer investment schedules but also to policy-driven shocks. The Trump administration has threatened tariffs that could effectively double the price of chips imported into the U.S. unless companies commit to building them in the U.S. This is creating considerably uncertainty for customers of Applied Materials’ tools for foundries which are largely located in Asia currently. Separately, See how Intel stock could rise to $60?
AI Tailwinds
The generative artificial intelligence (AI) wave is driving surging demand for semiconductors. AI workloads require significant computational power, higher memory capacity, and more complex chips, which need advanced manufacturing processes. AI also requires high-bandwidth memory and sophisticated chip packaging, areas where Applied Materials is well-positioned.For example, producing HBM chips is three times more wafer-intensive than standard DRAM, due to lower bit density and the need for 3D stacking. This directly translates into higher demand for products made by the likes of Applied. Applied, which has invested in these technologies ahead of rivals, could gain share as the AI market grows. This strength is already visible in margins, with gross margins rising 150 basis points year-over-year to 48.9% in Q3 FY’25.
Valuation and Outlook
Applied stock trades at just about 17x forward earnings, which is a reasonable multiple considering the company’s long-term growth prospects. Growth over the next two years is likely to remain muted due to geopolitical issues and potentially cooling spending, as companies may hold back on spending after nearly three years of outsized investments. Consensus forecasts growth rates of about 4% for FY’25 and 2% for FY’26. However, the longer-term narrative could be stronger. Capital spending on advanced chipmaking equipment is projected to nearly double between 2023 and 2028, per SEMI, with global capex outlays expected to top $100 billion in 2025 alone.
Although AI bellwether Nvidia (NASDAQ:NVDA) dominates headlines, with its stock up more than 3x over the last two years and its valuation approaching $4 trillion, lesser-known players such as Applied remain crucial to manufacturing the very AI chips that Nvidia sells. These stocks could offer value with more meaningful upside potential in the long-run. Should you Buy Or Fear Nvidia stock?
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