Applied Materials (NDQ:AMAT): The Quiet Backbone of the AI Revolution

We write a lot about semiconductor stocks, but little about Applied Materials and we thought it was time for that to change.

After all, Applied Materials is the world’s largest supplier of the equipment used to manufacture semiconductors, and one of the most structurally well-positioned companies in the global AI supply chain. Its investment case rests on three pillars: dominant market share across the widest portfolio in wafer fabrication equipment (WFE), accelerating demand from AI-driven capital expenditure cycles at TSMC, Micron, and Samsung, and a credible pathway to compound earnings well above 15% annually through FY30.

The stock is not cheap, trading at roughly 39x trailing earnings, and the mean analyst target price implies just 3.6% upside from the last close of US$431.20, but that framing understates what the consensus earnings trajectory actually means in net profit terms. We think the stock is at an inflection point and is worth looking into at this time.

Overview and History of Applied Materials

Applied Materials was founded in 1967 in Santa Clara, California, initially as a supplier of chemical vapour deposition equipment for the nascent semiconductor industry. Over the following five decades, it grew through a combination of organic R&D and acquisition to become the largest WFE provider in the world by revenue, ahead of ASML, Lam Research, and KLA.

The company’s reach spans virtually every stage of chip fabrication: deposition (the layering of materials onto wafers), etch, ion implantation, thermal processing, chemical mechanical planarisation, and advanced packaging. That breadth is both a competitive moat and a strategic differentiator — Applied is effectively present at every node of the manufacturing process, which limits the disruption any single competing technology can inflict on its revenue base.

Today, Applied operates through two primary segments: Semiconductor Systems, which contributes approximately 75% of revenue from the sale of WFE tools; and Applied Global Services (AGS), which provides spare parts, maintenance, and process optimisation services across the installed base. A third, smaller Display and Adjacent Markets segment addresses flat panel display manufacturing. The AGS segment is particularly valuable from an earnings quality perspective: it generates recurring, high-margin revenue tied to an installed base that compounds with every new tool sold — a dynamic that structurally supports margins through down-cycles.

AMAT’s Recent Results Look Good

FY25 (the 12 months to October 31 2025) was a landmark year for AMAT. Revenue reached a record US$28.37bn, up 4% year-on-year and representing the company’s sixth consecutive year of revenue growth. Non-GAAP EPS of US$9.42 grew 9% year-on-year; the gross margin of 48.7% was the highest in 25 years. Operating income reached US$8.51bn, and the operating margin recovery to 30% confirmed that the multi-year investment phase is now converting into genuine operating leverage.

The momentum continued into Q1 (the quarter ended January 2026): Revenue of US$7.01bn and non-GAAP EPS of US$2.38 both beat the top end of management’s guidance range and exceeded Street estimates, prompting an 8.1% single-session share price gain on 13 February 2026. Record DRAM revenue (driven by high-bandwidth memory (HBM) demand from AI accelerator production) was the standout. Management simultaneously guided Q2 revenue to approximately US$7.65bn and non-GAAP EPS of approximately US$2.64, a Q2 revenue midpoint US$640m above the prior Wall Street consensus. CFO Brice Hill accompanied the guidance with the statement that has anchored bullish sentiment ever since: Applied expects to grow its semiconductor equipment business by more than 20% in calendar 2026.

It is also worth noting the company’s capital return discipline. In FY25, AMAT distributed approximately US$2bn per quarter to shareholders via a combination of buybacks and dividends, reducing the share count from around 889m in early FY22 to approximately 793.6m today, a 10.7% reduction in less than four years. The dividend was raised 15% in early 2026 to US$0.53 per quarter.

The Outlook Facing AMAT

The consensus from the 34 analysts that cover AMAT is unambiguous in its directional view, if measured in its near-term price enthusiasm. The mean price target of US$447.18 (median US$450) implies just 3.6% upside from the last close of US$431.20. That modest spread between price and target is partly a function of how rapidly the stock has re-rated significantly. AMAT has risen approximately 180% in the past 52 weeks, moving from a low of US$153.47 to a high of US$448.45. It is also partly a reflection of analysts who acknowledge the structural growth story but are waiting for the second-half FY26 ramp to materialise before revising targets higher.

The earnings growth trajectory in the table below, however, is what makes the longer-term case compelling. Translating consensus normalised EPS against the current 793.6m shares on issue derives US$8.8bn in net profit in FY26, growing to US$16.7bn by FY30. Revenue is forecast to compound from US$31.6bn in FY26 to US$49.0bn by FY30, implying a five-year revenue CAGR of approximately 9%. The FY27 step-up (from US$31.6bn to US$38.5bn in a single year) reflects the consensus view that the second-half FY26 equipment ramp materialises as customers complete fab construction and begin volume production. Lam Research’s recent upward revision of global WFE spending to approximately US$140bn for CY26 provides independent corroboration of that thesis.

The structural drivers are well articulated by management. Each successive generation of high-bandwidth memory (HBM) is approximately three times larger by wafer area than standard DRAM and requires roughly 19 additional manufacturing steps, of which 15 involve WFE. AMAT captures more than 50% of the value of tooling in those additional steps. As HBM4 displaces HBM3, that wallet share compounds across generations. Cloud providers  – collectively tracking above US$600bn in capital expenditure in 2026, with projections exceeding US$700bn in 2027; represent an additional structural tailwind. Data centre demand now accounts for 30% of leading-edge wafer consumption and is on pace to overtake smartphones as the largest end-market by 2029.

Is Applied Materials Worth a Look?

In our view, yes — with qualifications. The bull case does not rest on the stock being cheap, because it is not. At approximately 39x trailing earnings and 35x FY2026 consensus EPS of US$11.12 (against a five-year average forward P/E closer to 25x), AMAT is priced for a cycle that must deliver. However, three factors argue that the premium is at least partially justified. First, the backlog visibility is unusually high: management cited two-year customer slot schedules, and CFO Hill’s 20%-plus semiconductor equipment growth commitment for calendar 2026 is a number that has peer-corroborated support.

Second, the EPIC Center — AMAT’s US$5bn collaborative R&D facility in Silicon Valley — creates a structural design-in advantage with customers including Samsung, Micron, and TSMC. Companies that co-develop manufacturing processes with Applied tend to adopt AMAT’s tools at scale. Third, on a peer-relative basis, Applied’s 27x forward EV/EBITDA is actually below Lam Research at 29x and KLA at 30x, despite a broader product portfolio.

The principal risks are real, however. China export restrictions represent the most immediate headwind: China has historically accounted for a meaningful share of WFE revenue, and any tightening of US export controls (a risk that has not diminished under current trade policy settings) removes a high-margin customer segment with limited short-term substitution.

The cyclicality of the semiconductor equipment industry also deserves respect in any discussion about AMAT: equipment spending can contract sharply when chipmakers experience inventory digestion or demand-side shocks. The company’s elevated R&D cost base, growing roughly 10% annually, creates a margin drag if the H2 FY2026 ramp is delayed or disappoints. And AMAT’s 180% 52-week gain means that much of the cycle optimism is already embedded in the price — the consensus mean target of US$447 leaves little room for re-rating from current levels absent an earnings surprise.

Conclusion

Applied Materials is not a value investment and should not be assessed as one. It is a high-quality, market-leading business in a structurally growing industry, currently priced at a premium that reflects a consensus expectation of sustained double-digit earnings growth through FY30. The net profit trajectory the consensus implies (from US$8.8bn in FY26 to US$16.7bn by FY30) is significant, and the underlying demand drivers (AI, HBM, advanced packaging, hyperscaler capex) are real and compounding.

There might be short-term volatility amidst quarterly results, but for long-duration investors willing to accept semiconductor cycle risk and a starting multiple above historical norms, the case for accumulation on any meaningful weakness remains intact.