đ usncan Note: Buy, Sell Or Hold Applied Materials Stock?
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In this photo illustration an Applied Materials logo seen displayed on a smartphone screen in Athens, Greece on May 11, 2022. (Photo illustration by Nikolas Kokovlis/NurPhoto via Getty Images)
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Applied Materials (NASDAQ:AMAT) published a set of Q3 results that exceeded expectations last week, yet the stock has declined approximately 15% since the earnings announcement due to worries about future demand, especially from China. Although Applied is well-placed to gain from a higher proportion of advanced equipment linked to generative AI and next-generation process technologies, geopolitical factors seem to impede progress.
Earnings Exceeded Expectations, Guidance Weak
For Q3, Appliedâs revenue was $7.30 billion, representing a 7.7% increase year-over-year, with adjusted EPS of $2.48, both surpassing expectations. Nevertheless, the outlook for Q4 (October fiscal year) was significantly less optimistic. The company projected revenue to be around $6.70 billion at the midpoint, considerably below the $7.30 billion consensus, while forecasted earnings were $2.11 at the midpoint, also falling short of analyst expectations. Management attributed this decline mainly to reduced demand for leading-edge logic equipment from China, a market that is currently facing challenges from both investment slowdowns and regulatory uncertainties. In contrast, DRAM demand remains strong and may reach record levels, underscoring the disparity across various segments of the semiconductor industry.
Chinaâs significant role in Appliedâs business poses a major risk. This region contributed 35% of revenue last quarter, substantially more than the 9% from the U.S., highlighting Applied’s reliance on Chinese customers. As a result, the company is susceptible not only to changing customer investment timelines but also to policy-driven disruptions. The Trump administration has indicated that tariffs could effectively double the costs of chips imported into the U.S. unless companies commit to manufacturing them in the U.S. This situation creates considerable uncertainty for customers of Applied Materialsâ tools for foundries, which are largely situated in Asia at present. Separately, observe how Intel stock could potentially rise to $60?
AI Support
The generative artificial intelligence (AI) trend is fueling a surge in semiconductor demand. AI workloads necessitate substantial computational capability, enhanced memory capacity, and more intricate chips, which require advanced manufacturing methods. AI also calls for high-bandwidth memory and sophisticated chip packaging, areas in which Applied Materials is favorably positioned. For instance, manufacturing HBM chips is three times more wafer-intensive than producing standard DRAM, due to lower bit density and the necessity for 3D stacking. This directly leads to higher demand for products created by companies like Applied. As Applied has invested in these technologies ahead of competitors, it stands to gain market share as the AI sector expands. This strength is already reflected in margins, with gross margins increasing by 150 basis points year-over-year to 48.9% in Q3 FYâ25.
Valuation and Forecast
Applied stock is currently trading at approximately 17 times forward earnings, which is a reasonable multiple given the companyâs long-term growth potential. Growth over the next two years is likely to remain subdued due to geopolitical challenges and potentially declining spending, as companies may pull back on expenses after nearly three years of significant investments. Consensus projections indicate growth rates of about 4% for FYâ25 and 2% for FYâ26. However, the narrative for the longer term could be more robust. According to SEMI, capital spending on advanced chip manufacturing equipment is expected to nearly double between 2023 and 2028, with global capital expenditures projected to exceed $100 billion in 2025 alone.
Despite AI leader Nvidia (NASDAQ:NVDA) dominating the news cycle, with its stock more than tripling in the past two years and its valuation nearing $4 trillion, lesser-known companies like Applied are still critical in manufacturing the very AI chips that Nvidia markets. These stocks could present value with greater upside potential in the long run. Should you Buy Or Fear Nvidia stock?
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