Can AMAT Maintain Strong Margins Amid Rising R&D Expenses?

Applied Materials AMAT has been continuously ramping up its R&D investments. For instance, AMAT set up the Equipment and Process Innovation and Commercialization center for research, which is expected to be operational by 2026. The company is also collaborating with organizations like CEA-Leti and increasing its overall R&D expenses.

As discussed in its third-quarter fiscal 2025, the company is reducing its general and administrative expenses to offset the rising cost of R&D, which has effectively enabled AMAT to maintain its operating margin. AMAT’s non-GAAP operating margin expanded 190 basis points in the third quarter of fiscal 2025.

On the gross margin front, AMAT achieved a standout 49.2% in the second quarter of fiscal 2025, which was also its highest level since fiscal year 2000. In the third quarter of fiscal 2025, AMAT’s non-GAAP gross margin expanded 150 basis points solely on the back of high-margin products, including Sym3 Magnum etch system, Cold Field Emission eBeam technology, gate-all-around, backside power delivery, and 3D DRAM systems.

Applied Materials’ margins are expected to remain strong as demand for high-performance computing and AI continues to grow, and as long as the company takes prudent decisions to cut other expenses. For fiscal 2025, our estimates show that AMAT’s gross margin will expand 120 basis points and its operating margins will expand 100 basis points.

How Competitors Fare Against AMAT

Applied Materials faces intense competition from Lam Research LRCX and ASML Holding ASML across 3D DRAM architectures, EUV Lithography, deposition and etching. Both Lam Research and ASML Holding have seen growth in gross margin and operating margin in recent quarters.

However, ASML expects the second half of the year to fetch comparatively lower gross margin due to the revenue recognition from low-margin High Numerical Aperture EUV tools and lower upgrade revenues. Lam Research continues to project a strong gross margin. Recently, LRCX delivered a record gross margin of 50.3% and its operating margins also came to 33.7% in the fourth quarter of fiscal 2025.

Strong margins will help Applied Materials to stay competitive in the semiconductor manufacturing equipment market, which is expected to witness a CAGR of 7.3% from 2024 to 2029, according to a report by MarketsAndMarkets.

AMAT’s Price Performance, Valuation and Estimates

Shares of Applied Materials have gained 0.4% year to date against the Electronics - Semiconductors industry’s growth of 37.4%.

From a valuation standpoint, Applied Materials trades at a forward price-to-sales ratio of 4.48X, lower than the industry’s average of 9.66X.

The Zacks Consensus Estimate for Applied Materials’ fiscal 2025 and 2026 earnings implies year-over-year growth of 8.55% and 0.92%, respectively. The estimate for fiscal 2025 has been revised upward in the past seven days, while the estimate for fiscal 2026 has been revised downward in the past seven days.

Applied Materials currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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

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