Should You Buy, Sell or Hold Applied Materials Stock Post Q2 Earnings?
The year 2025 has remained highly volatile for AMAT stock, with its share price rising mere 1.9% year to date. The stock has also underperformed other semiconductor players, including Lam Research LRCX, KLA Corporation KLAC and ASML Holding ASML.
The underperformance of AMAT's share price, along with concerns related to China sales prospects, raises the question: Should investors buy, hold or sell AMAT stock?
Declining China Sales: A Key Concern for AMAT's Prospects
A major headwind for Applied Materials is increasing U.S.-China tensions and export restrictions on semiconductor manufacturing equipment. China remains a crucial market for Applied Materials, accounting for a significant portion of total revenues. However, U.S. government restrictions on selling advanced semiconductor equipment to Chinese manufacturers are hurting Applied Materials' sales and growth outlook.
In the second quarter of fiscal 2025, Applied Materials' China sales plunged 37.3% year over year to $1.77 billion. China market's contribution to total revenues also shrank to 25% from the year-ago quarter's 43%. This marked the third consecutive quarter of a year-over-year fall in China revenues.
Earlier, management had acknowledged that the company faces elevated uncertainty in China due to ongoing geopolitical tensions and regulatory scrutiny. If stricter export controls are imposed, Applied Materials' long-term revenue potential could take a hit, as Chinese chipmakers are forced to turn to domestic alternatives or non-U.S. suppliers.
However, despite the headwinds, AMAT has several upsides that enable the company to perform well.
AMAT Leads the Market With Superior Technology
Applied Materials is well-positioned to capitalize on the demand for AI-driven semiconductors that has become the driving force for this industry. AMAT has made significant strides in cutting-edge chip manufacturing, particularly in gate-all-around (GAA) transistors, high-bandwidth memory and advanced packaging. These innovations are critical to enabling faster, more energy-efficient AI processing.
Applied Materials' revenues from advanced semiconductor nodes surpassed $2.5 billion in fiscal 2024, and management expects this figure to double in fiscal 2025. The transition from FinFET to GAA transistors is expanding AMAT's total addressable market by 15%, while Applied Materials' revenues in this segment are projected to grow 30% per wafer fab capacity expansion. The company is also on track to secure more than 50% of the market share in GAA and backside power delivery, solidifying its leadership in the AI computing era.
The advanced packaging segment has become an increasingly critical part of Applied Materials' business, with revenues tripling over the past four years to $1.7 billion in fiscal 2024. AMAT has secured volume orders from leading-edge customers for its Integrated Hybrid Bonding technology, strengthening its position in next-generation chip manufacturing. The upcoming EPIC Center in Silicon Valley, expected to go live in 2026, will further drive innovation in semiconductor packaging and process technology.
In its most recent earnings report, AMAT highlighted that the company is well-positioned to gain from demand growth in gate-all-around transistors, backside power delivery, and high-bandwidth memory. Applied Materials' gross margins hit 49.2% in the second quarter of fiscal 2025, which was the highest since 2000. Moreover, the company expects its advanced DRAM revenues to grow more than 40% in 2025, driven by DDR5 and HBM.
Due to all these positive factors, analysts are optimistic about the stock's future growth. The Zacks Consensus Estimate for fiscal 2025 and 2026 revenues is projected to grow 5.96% and 5.7%, respectively. The Zacks Consensus Estimate for 2025 and 2026 earnings is projected to grow 9.2% and 5%, respectively. Applied Materials is on track to sustain its momentum. Additionally, the company has consistently outperformed earnings expectations, delivering an average surprise of 4.94% over the last four quarters, reflecting its strong execution capabilities.
AMAT's Valuation Offers Upside Potential
Applied Materials is trading at a 12-month forward P/E ratio of 17.09, significantly below the industry average of 25.5. Given its dominance in semiconductor equipment and AI-driven chip manufacturing, this valuation discount suggests strong upside potential over the long term.
Applied Materials is also trading at a lower P/E multiple than other semiconductor companies, including Lam Research, KLA Corporation and ASML Holding. Currently, Lam Research, KLA Corporation and ASML Holding have a P/E multiple of 21.25X, 24.1X and 26.2X, respectively.
Applied Materials Forward 12 Months (P/E) Valuation Chart
Conclusion: Hold AMAT for Now
Applied Materials remains a key player in semiconductor manufacturing, with a strong position in AI-driven chip development, advanced packaging and next-generation process technology. For investors, retaining AMAT is the best approach. Currently, Applied Materials carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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