Applied Materials Earnings: Chip Investment Driving Good Results Despite China Headwind

Key Morningstar Metrics for Applied Materials

• Fair Value Estimate: $193.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Applied Materials' Earnings

Applied Materials' AMAT January-quarter sales rose 7% year over year and 2% sequentially to $7.17 billion. April-quarter guidance implies a slight sequential sales decline at the midpoint, inclusive of roughly $200 million in missed revenue as a result of updated trade restrictions by the United States on China.

Why it matters: We view Applied’s core equipment demand as healthy, despite the China headwind that led the April quarter outlook to miss our model. We see investment in cutting-edge chips, driven by generative artificial intelligence infrastructure buildouts, as the firm’s primary driver in the medium term.

• Applied quantified the total headwind for fiscal 2025 from China restrictions at $400 million, slightly milder than expectations from peers like Lam Research and KLA. We expect healthy growth despite this headwind and don’t expect it to carry past fiscal 2025.
• Applied is best exposed to leading-edge logic and DRAM memory chips, which we see as the biggest targets of chip investment over the medium term, largely driven by AI. This should help Applied see an outsize benefit from this rising investment, in our view.

The bottom line: We maintain our fair value estimate of $193 per share, with our long-term growth thesis intact. We see shares at a slight discount after a 5% after-hours selloff that we attribute to April-quarter guidance missing market expectations.

• We’ve trimmed our fiscal 2025 sales forecast from both the new restrictions on China and some pulled-forward demand after significant lagging edge and DRAM orders in fiscal 2024. We model China dipping to a mid-20% sales mix for the rest of fiscal 2025, versus 30% historically.
• We still expect strong underlying market demand and gradual share gains for Applied over the next five years. In particular, we expect more penetration of advanced packaging techniques that should utilize relatively more of Applied’s equipment and integrated solutions.