Applied Materials' Margins Expand: Will the Momentum Sustain?

Applied Materials’ AMAT gross margin came in at 48.8% in the fourth quarter of fiscal 2025, up 120 basis points year over year. The positive momentum in the gross margin has been there for the past six quarters as the company is gaining from a favorable mix of products and traction in high-margin solutions.

AMAT’s margins are growing on the back of leading-edge logic foundry solutions, Sym3 Magnum etch system, Cold Field Emission eBeam technology, gate-all-around, backside power delivery, and 3D DRAM technology nodes used in the manufacturing of AI and high performance computing chips, as these are inherently high-margin products.

AMAT’s Sym3 Magnum etch system is gaining traction because of its capability to develop high-aspect-ratio structures in 3D NAND, DRAM and logic, which are powering AI and HPC workloads. The Cold Field Emission eBeam technology, which is used in detecting defects at the nanometer scale, is also crucial for high-performance chip manufacturing and testing.

Significant growth in AMAT’s memory segment, including its advanced DRAM technologies, is also an upside. Nevertheless, AMAT has been continuously ramping up its R&D investments, which are offsetting its margin gains. In the fourth quarter of fiscal 2025, AMAT’s R&D expenses increased 10% year over year.

To counter this, AMAT 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. Cutting headcount has been the strategy that AMAT is using to scale productively while maintaining margins.

Applied Materials’ margins are expected to remain strong as demand for high-performance computing and AI continues to grow, as long as the company takes prudent decisions to cut other expenses.

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.

Lam Research delivered a record gross margin of 50.6% and its operating margins also came to 35% in the first quarter of fiscal 2026. ASML Holding’s third-quarter fiscal 2025 gross margins were 51.6%. Strong margins of all three companies reflect the profitability of the chip manufacturing equipment space in this AI era.

AMAT’s Price Performance, Valuation and Estimates

Shares of Applied Materials have gained 49.5% year to date compared with the Electronics - Semiconductors industry’s growth of 44.7%.

From a valuation standpoint, Applied Materials trades at a forward price-to-sales ratio of 6.63X, lower than the industry’s average of 7.73X.

The Zacks Consensus Estimate for Applied Materials’ fiscal 2025 and 2026 earnings implies year-over-year growth of 0.96% and 15.77%, respectively. The estimates for fiscal 2025 and 2026 have been revised upward in the past 30 days.

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

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