Applied Materials (AMAT)

Semiconductor machinery manufacturer Applied Materials (NASDAQ:AMAT) beat Wall Street’s revenue expectations in Q3 CY2025, but sales fell by 3.5% year on year to $6.8 billion. Guidance for next quarter’s revenue was better than expected at $6.85 billion at the midpoint, 0.7% above analysts’ estimates. Its non-GAAP profit of $2.17 per share was 3.3% above analysts’ consensus estimates.

Company Overview

Founded in 1967 as the first company to develop tools for other businesses in the semiconductor industry, Applied Materials (NASDAQ:AMAT) is the largest provider of semiconductor wafer fabrication equipment.

Its primary peers and competitors are ASML (NASDAQ:ASML), Lam Research (NASDAQ:LCRX), KLA Corp (NASDAQ: KLAC), and Tokyo Electron (TSE:8035).

The semiconductor capital (manufacturing) equipment group has become highly concentrated over the past decade. Suppliers have consolidated, and the increasing cost of innovation have made it unaffordable to almost everybody, except the largest companies, to produce leading edge chips. The result of the increased industry concentration has been higher operating margins and free cash generation through the cycle. Despite this structural improvement, the businesses can still be quite volatile, as demand fluctuations for the semiconductor equipment are magnified by the already cyclical nature of underlying semiconductor demand. Read More. Chip manufacturing is done in "batches" on a single round silicon disk, known as a "wafer". Multiple chips can be fabricated on a single wafer, which itself can cost over $10,000 today for the more advanced nodes. The actual chip fabrication process requires hundreds to thousands of steps that are executed at an atomic scale. From start to finish, including fabrication, testing and packaging, it can take 3 months to make a chip. The process to create a silicon wafer starts with sand, which is melted to extract silicon, then purified and formed into a cylinder, which is then sliced down into discs about 1mm thick that are then polished into wafers. Next, the wafers go to a semiconductor foundry and go through a process where successive layers of insulating, conducting, and semiconducting materials are stacked on top of one another to form many small complex interconnected 3D structures (wires, insulators, etc), with each layer consisting of 15-20 processes such as deposition, lithography, etching, stripping, testing, and cleaning.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Thankfully, Applied Materials’s 10.5% annualized revenue growth over the last five years was solid. Its growth beat the average semiconductor company and shows its offerings resonate with customers. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

We at StockStory place the most emphasis on long-term growth, but within semiconductors, a half-decade historical view may miss new demand cycles or industry trends like AI. Applied Materials’s annualized revenue growth of 3.4% over the last two years is below its five-year trend, but we still think the results were respectable.

This quarter, Applied Materials’s revenue fell by 3.5% year on year to $6.8 billion but beat Wall Street’s estimates by 2.2%. Company management is currently guiding for a 4.4% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 1.7% over the next 12 months, a slight deceleration versus the last two years. This projection is underwhelming and implies its products and services will see some demand headwinds.

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business’ capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, Applied Materials’s DIO came in at 152, which is 13 days above its five-year average, suggesting that the company’s inventory has grown to higher levels than we’ve seen in the past.

Gross profit margin is a key metric to track because it shows how much money a semiconductor company gets to keep after paying for its raw materials, manufacturing, and other input costs.

Applied Materials’s gross margin is slightly below the average semiconductor company, indicating its products aren’t as mission-critical as its competitors. As you can see below, it averaged a 48.1% gross margin over the last two years. Said differently, Applied Materials had to pay a chunky $51.92 to its suppliers for every $100 in revenue.

This quarter, Applied Materials’s gross profit margin was 48%, in line with the same quarter last year. On a wider time horizon, Applied Materials’s full-year margin has been trending up over the past 12 months, increasing by 1.2 percentage points. If this move continues, it could suggest better unit economics due to some combination of stable to improving pricing power and input costs (such as raw materials).

Applied Materials has been an efficient company over the last two years. It was one of the more profitable businesses in the semiconductor sector, boasting an average operating margin of 29.1%.

Analyzing the trend in its profitability, Applied Materials’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q3, Applied Materials generated an operating margin profit margin of 25.2%, down 3.9 percentage points year on year. Since Applied Materials’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Applied Materials’s EPS grew at a solid 17.6% compounded annual growth rate over the last five years, higher than its 10.5% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t improve.

Diving into Applied Materials’s quality of earnings can give us a better understanding of its performance. A five-year view shows that Applied Materials has repurchased its stock, shrinking its share count by 13.4%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

In Q3, Applied Materials reported adjusted EPS of $2.17, down from $2.32 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 3.3%. Over the next 12 months, Wall Street expects Applied Materials’s full-year EPS of $9.42 to stay about the same.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Applied Materials has shown robust cash profitability, and if it can maintain this level of cash generation, will be in a fine position to ride out cyclical downturns while investing in plenty of new products and returning capital to investors. The company’s free cash flow margin averaged 23.7% over the last two years, quite impressive for a semiconductor business.

Taking a step back, we can see that Applied Materials’s margin was unchanged over the last five years, showing its long-term free cash flow profile is stable.

Applied Materials’s free cash flow clocked in at $2.04 billion in Q3, equivalent to a 30% margin. This cash profitability was in line with the comparable period last year and above its two-year average.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Applied Materials hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 47.2%, splendid for a semiconductor business.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Applied Materials is a profitable, well-capitalized company with $8.57 billion of cash and $6.56 billion of debt on its balance sheet. This $2.02 billion net cash position gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was good to see Applied Materials beat analysts’ EPS expectations this quarter. We were also happy its adjusted operating income outperformed Wall Street’s estimates. On the other hand, its inventory levels materially increased. Overall, this print had some key positives. Investors were likely hoping for more, and shares traded down 2.1% to $219.12 immediately after reporting.

Updated: December 4, 2025 at 9:23 PM EST

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Applied Materials, you should also grasp the company’s longer-term business quality and valuation.

Applied Materials has some positive attributes, but it isn’t one of our picks. To kick things off, its revenue growth was solid over the last five years. And while Applied Materials’s projected EPS for the next year is lacking, its stellar ROIC suggests it has been a well-run company historically.

Applied Materials’s P/E ratio based on the next 12 months is 28.3x. While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $248.44 on the company (compared to the current share price of $269.48).