Applied Materials Before Q3 Earnings: How to Play the Stock

Applied Materials AMAT is scheduled to report third-quarter fiscal 2025 results on Aug. 14.

For the fiscal third quarter, AMAT expects net sales of $7.2 billion (+/-$400 million). The Zacks Consensus Estimate for revenues is pegged at $7.2 billion, suggesting a rise of 6.2% from the year-ago quarter’s reading.

Applied Materials projects non-GAAP earnings of $2.35 (+/-$0.20) per share. The Zacks Consensus Estimate for earnings is pegged at $2.34 per share, indicating growth of 10.4% from the year-ago quarter’s reported figure. The figure has remained unchanged in the past 60 days.

AMAT has an impressive earnings surprise history. In the last reported quarter, the company delivered an earnings surprise of 3.5%. Its earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 4.9%.

Earnings Whispers for Applied Materials

Our proven model does not conclusively predict an earnings beat for Applied Materials this time. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat, which is not the case here. You can see the complete list of today’s Zacks #1 Rank stocks here.

AMAT carries a Zacks Rank #2 and has an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.

Factors to Note Ahead of Applied Materials’ Q3 Results

Applied Materials is at the forefront of leading-edge logic, compute memory or high-performance DRAM, stacking technology and advanced packaging. AMAT’s positioning in key processes of chip manufacturing is expected to aid the company in capitalizing on the growing proliferation of AI, hyperscale and high-performance computing space.

Rising demand for advanced semiconductor chips that power AI-based data centers is expected to have contributed to the third quarter of fiscal 2025 results of the company. Its strong capabilities in logic and solid position in DRAM patterning are likely to have acted as boons.

AMAT’s patterning systems and technologies that are designed to address the shrinking pattern dimension challenges and the growing complexity in vertical stacking are likely to have benefited the segment. Applied Materials’ manufacturing equipment, which helps improve the performance, power, yield and costs of semiconductor devices that serve the IoT, communications, automotive, power and sensors markets, is likely to have contributed well to the top-line growth of the segment.

However, escalating tensions between the United States and China do not bode well for semiconductor companies. This is likely to have hindered the top-line growth of the segment. Changes in the spending patterns of key customers and supply-chain constraints are likely to have been other headwinds. Weak spending in the LCD equipment market is likely to have hurt Applied Materials’ Display and Adjacent Markets segment sales in the to-be-reported quarter.

Applied Materials’ Price Performance & Valuation

Applied Materials shares have gained 13.6% year to date, underperforming the Zacks Electronics – Semiconductors industry, which has gained 19.7% over the same time frame.

AMAT YTD Performance Chart

Let us now look at the value Applied Materials offers to its investors at current levels. AMAT is currently trading at a discount with a forward 12-month price-to-earnings (P/E) of 18.79X compared with the industry’s 25.55X.

AMAT Forward 12 Month (P/E) Valuation Chart

Investment Thesis on Applied Materials

Applied Materials’ business continues to be on a growth trajectory with significant design wins. It is well-positioned to capitalize on the technology-inflection-led growing demand for next-generation chips on the back of its product innovations and leadership in leading-edge logic, compute memory, high bandwidth memory and advanced packaging.

However, Applied Materials faces near-term challenges that could impact its stock. The U.S.-China trade tensions, particularly the restrictions on high-tech exports to China, have created uncertainties for companies operating in the semiconductor industry. Competition from players like KLA Corporation KLAC, Lam Research LRCX and ASML Holdings ASML in the semiconductor supply chain market is also a concern for AMAT.

Lam Research’s memory segment, accounting for both Dynamic Random Access Memory and Non-Volatile Memory divisions, is gaining traction on the back of AI. Lam Research’s memory and Non-Volatile Memory division’s sales are gaining traction. The rising demand for AI chips is also ramping up the demand for advanced process control and process-enabling solutions provided by KLA Corporation.

KLAC’s advanced packaging solutions are also experiencing robust traction on the back of AI and high-performance computing. ASML Holding’s DRAM and logic customers are driving the demand for its products. These customers are ramping leading-edge nodes using ASML’s NXE:3800E EUV systems. Additionally, ASML noted that multiple DRAM customers are adopting EUV lithography, which helps in shortening cycle time and lowering costs.

Conclusion: Buy AMAT Stock Right Now

Although our model does not conclusively predict an earnings beat for Applied Materials this quarter, its strong fundamentals and favorable valuation make the stock worth investing in at present, despite facing competition from KLAC, ASML and LRCX.

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This article originally published on Zacks Investment Research (zacks.com).

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