Should You Buy, Sell or Hold AMAT Stock After a 6.2% YTD Rise?

Applied Materials AMAT has gained 6.2% in the year-to-date period, outperforming the Zacks Computer and Technology sector's return of 2.5%.

This outperformance raises the question: Should investors accumulate AMAT shares or book profits and exit the investment?

Applied Materials YTD Price Perfomance

AMAT Rides AI Wave With Leadership in Advanced Chipmaking

As AMAT serves as a key player in the semiconductor supply chain, the rise of the AI-driven semiconductor boom is likely to drive AMAT. Applied Materials has made significant strides in advanced chip manufacturing, particularly in gate-all-around (GAA) transistors, high-bandwidth memory and advanced packaging, which are crucial for AI-based operations.

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.

AMAT is positioned well to benefit from the increasing demand for advanced chips required to power AI-centric data centers. Its strong capabilities in logic and solid position in DRAM patterning have aided it in maintaining a stronghold in the semiconductor space. Its patterning systems and technologies, which are designed to address the shrinking pattern dimension challenges and the growing complexity in vertical stacking, can play a crucial role in high-performance chip development for AI.

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 6% and 5.55%, respectively. The Zacks Consensus Estimate for 2025 and 2026 earnings is projected to grow 9.5% and 5.5%, respectively.

AMAT Experiences Macroeconomic and Competitive Headwinds

A major headwind for Applied Materials is the intermittent 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.

Furthermore, Applied Materials operates in a highly competitive market space where it faces competition from players like Lam Research LRCX in the semiconductor space, ASML Holding ASML in the photolithography and advanced manufacturing equipment segment. KLA Corporation KLAC is a dominant competitor in the wafer inspection space.

For instance, Lam Research develops Atomic Layer Deposition tools like AT200M, AT410 and AT650P that are similar to the devices made by AMAT. Both ASML and AMAT specialize in advanced semiconductor nodes, although they develop solutions for various stages of semiconductor production. ASML Holdings develops lithography solutions, including EXE and NXE systems.

Applied Materials and KLA Corporation offer similar solutions, like Wafer Inspection, Yield Enhancement and Process Control inspection systems. KLA Corporation develops inspection systems, including 3935 and 3920 EP broadband plasma defect inspection systems. Although Applied Materials is dealing with a broader market sell-off and growing competition, not everything is gloom and doom for the company.

AMAT’s Valuation Offers Upside Potential

Applied Materials is trading at a 12-month forward P/E ratio of 17.92, significantly below the industry average of 31.62. Given its dominance in semiconductor equipment and AI-driven chip manufacturing, this valuation discount suggests strong upside potential over the long term.

AMAT Forward 12 Month (P/E) Ratio

Conclusion: Hold AMAT Stock 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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This article originally published on Zacks Investment Research (zacks.com).

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