Applied Materials: Strong Fundamentals, but Cycle Risks Keep Me at Hold

I see Applied Materials AMAT as the real backbone of the semiconductor world. Its equipment handles the critical steps of chipmaking like deposition, atomic etching, precision measurement, and packaging. Without AMAT's technology, companies like TSMC, Intel, Samsung, or Micron wouldn't even be able to build chips in the first place. Over the years, AMAT has cemented itself as one of the industry heavyweights in materials engineering, with a strong presence in advanced memory like DRAM and high-bandwidth memory. I think of it as the behind-the-scenes giant that keeps the industry moving forward.

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The Cyclical Nature of Semiconductors

The semiconductor space feels a lot like the weather to me. You can enjoy the sunny stretches, but you know the storm is always coming sooner or later. These cycles are impossible to time perfectly, but right now we're clearly in the bright part of the cycle. AI demand is fueling record levels of data center spending, and orders are coming in strong across the supply chain. Nvidia, AMD, Micron, and Applied Materials are all clear beneficiaries. That said, AMAT's latest earnings call reminded me that this momentum won't last forever, and a turn in the cycle can happen quicker than people expect. What makes semis so tricky is that the industry doesn't always move in lockstep. Different areas heat up and cool off at different times. Memory like DRAM could be surging thanks to AI data centers, while smartphones and PCs are slowing. Foundries might cut back on equipment spending if handset demand stays weak, even as AI-related spending keeps setting records. To me, AMAT sits right at the intersection of all this, exposed to both the ups and downs depending on which segments are driving demand. That's also why you can't just look at one earnings number from a chip company and decide the whole cycle is turning up or down.

From my perspective, the leading edge; the most powerful chips; is the best place to watch for cycle shifts. If demand slows there, it's often an early warning for the rest of the industry. That's why AMAT's guidance has been on my radar. Recently, the stock has lagged peers because of softer deliveries and weaker outlooks from management. The market hasn't taken that well, and I think part of the harsh reaction came from timing and inflated expectations, not just weaker fundamentals. Still, to me, AMAT's cautious guidance is a reminder that even in a strong cycle, there are cracks forming that investors need to pay attention to.

Strong Earnings Performance

Applied Materials' latest results looked solid on the surface. Revenue was up 8% from last year, with non-GAAP EPS growing 17% YoY. The Semiconductor Systems segment, which makes up about 75% of sales, remained the main driver, delivering $5.43 billion with a 36.4% operating margin. The other 25% of revenue came from services, upgrades, and maintenance through Applied Global Services, which I see as a stable, recurring stream. That business extended its streak to 24 straight quarters of YoY growth, which is impressive. Even the Display segment, usually the quietest part of AMAT's business, chipped in with OLED equipment momentum. In short, all segments contributed, with DRAM demand especially strong thanks to AI hardware.

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Margins stayed strong too. Gross margins were almost 49%, which is in line with peers and also the highest levels AMAT has seen since the dot-com era in 2000. Operating margins held steady above 30%, showing me that the company is still managing its profitability well, even through cycles. With AI-related demand for products like 3D DRAM and eBeam tools on the rise, AMAT has been able to capitalize. Cash flow was equally healthy, with $2.05 billion in FCF generated this quarter. Of that, $1.4 billion went right back to shareholders in dividends and buybacks. Management continues to target 80100% of FCF for shareholder returns. On top of that, their balance sheet looks fine to me: $6.17 billion in cash versus $5.46 billion in long-term debt, and a debt-to-equity ratio below the industry average. If you stopped there, you'd think the stock should have rallied hard after earnings; but it didn't quite play out that way.

Cut Guidance and China Risk

The big disappointment was guidance. AMAT cut its FY25 Gate-All-Around (GAA) forecast from $5 billion to $4.5 billion, citing nonlinear demand. A big part of that was China. ICAPS revenue from China is expected to fall $500 million sequentially after heavy overordering in 20232024, and now customers are in digestion mode. China made up about 25% of AMAT's revenue last quarter, so this is still a big swing factor. I expected a correction here, but the drop looked sharper than I thought, and logic demand didn't offset it either. Management also admitted Q4 orders were coming in uneven, which to me is an early sign the cycle may be nearing a turning point. The Display segment was a bright spot, with OLED equipment demand pushing growth into the mid-teens, but it's too small to offset weakness in Semiconductor Systems. Meanwhile, DRAM comps were tough against last year's China boom, and I'm not convinced Hynix and Micron alone can pick up enough slack. Adding to this, trade restrictions remain a headache. CEO Gary Dickerson already projected around $400 million in lost sales this fiscal year from export limits. Guidance also excluded potential upside from licenses in backlog, which shows management is being conservative but also signals uncertainty. With U.S.China trade tensions still simmering, this could continue to weigh on AMAT's sales.

Underperformance and Policy Wildcards

Applied Materials has been underperforming peers for a while now, and I think that's why the stock trades at a discount. With expectations reset this quarter, the question for me is whether this is just a temporary air pocket or if the weakness is structural. On the positive side, I do think the worst of the China digestion is behind us. Logic demand will need new equipment as utilization is already high, and the GAA transition still requires AMAT's tools, so I don't view the weaker guide as a long-term share loss. One big swing factor is tariffs. Recently, Donald Trump floated the idea of a 100% tariff on imported semiconductors, with exemptions for U.S.-based production. That could actually be a tailwind for AMAT since more onshoring means more U.S. equipment demand. The company is investing heavily in that direction too, pouring $200 million into a new Arizona facility after already spending $400 million domestically in the past five years. It's also worth noting that AMAT has been reducing its reliance on China; revenues there fell from 43% in Q1 to 25% last quarter; by ramping operations in Taiwan. That's a smart move in my view, as Taiwan is expected to be a growing revenue driver long term. But policy risk cuts both ways. Customers tend to get cautious when trade rules shift, sometimes pulling orders forward (pull-ins) or delaying purchases until the outlook clears. So while there's upside in onshoring, there's also the chance that policy uncertainty slows demand across the board.

Valuation Thoughts

The biggest risk here is that AMAT's current valuation already bakes in the need for future growth. Even though the stock trades at a lower multiple than many of its silicon peers, a P/E around 17.5x still requires solid earnings growth to keep supporting it. That makes sense for a company with AMAT's profiletech leadership, strong margins, healthy cash flow, and steady buybacks/dividendsbut it also means investors are relying on the cycle not turning against them. If the market slows, there's a chance holders will sit on some red for a while, though long-term investors could see that as an opportunity to add through dollar-cost averaging. From a valuation lens, AMAT looks fairly priced, maybe even a touch cheap against its own history, but it doesn't exactly scream bargain. Slower growth and downward EPS revisions weigh on the bull case, and even peers who had stronger earnings weren't very confident about the 2026 outlook. That sector-wide uncertainty makes me more cautious. I like that expectations have been reset after this quarter's earnings, but in my view, the stock still isn't cheap enough to warrant buying aggressively right now. For that reason, I'm sticking with a Hold.

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Guru & Analyst Views

Some well-known investors are continuing to lean in quietly on AMAT, even with uncertainty. T. Rowe Price Equity Income Fund added about 5.17%, Parnassus Value Equity Fund (Trades, Portfolio) added 2.24%, Elfun Trusts (Trades, Portfolio) made a modest add, Joel Greenblatt (Trades, Portfolio) increased his holding by about 33%, Jeremy Grantham (Trades, Portfolio) added 27%, and George Soros (Trades, Portfolio) added nearly 69%. These are not huge numbers in percentage of outstanding shares, but I think they show that several smart money managers still believe in its long-term opportunity. It's the kind of accumulation that tells me people are willing to take some short-term risk in exchange for what they see as durable tech leadership. On the analyst front, there's mixed sentiment but with enough positives to be interesting. For example, Jefferies upgraded AMAT to Buy earlier this year, citing stronger demand in DRAM and NAND, plus AI-related capex. Meanwhile, Mizuho recently lowered its rating (Outperform to Neutral) and cut price targets based on concerns over China exposure and possible lagging demand in 2026. Despite that, AMAT still beat expectations in its recent quarter. Putting this together, I feel the market is setting low bars right now; which might leave room for upside if AMAT can steady its guidance and deliver on what insiders think it can.

Concluding Thoughts

Applied Materials still faces some key overhangs, particularly its exposure to China on both the revenue and supply chain side. While a degree of normalization was expected, the pace of the slowdown has been sharper than I anticipated, with logic demand coming in softer and DRAM remaining a clear risk. That said, I don't see this as a structural problem. The ICAPS segment looks de-risked, utilization is solid, and the company's GAA transition should keep future capex healthy. Combined with secular growth drivers like AI, advanced manufacturing, and electrification, the business is still fundamentally in good shape. Valuation also sits near its historical averages, which means the stock isn't screamingly cheap, but it isn't stretched either.

The question is really about timing. If you're investing with a long-term horizon, this quarter feels like just another data point in AMAT's long track record of riding through cyclical swings. But if you're trading around the cycle, the risk/reward is less appealing. Guidance implies demand could get choppy in the near term, and in semis, that's often the first sign of a slowdown. It doesn't necessarily mean we're at the peak today, but the next couple of quarters could bring the confirmation of softer demand and downside in the stock. With expectations now reset, I see the setup as balanced rather than compelling, which keeps me at Hold.