AMAT's High Margin Solutions Gain Traction: How Long Will it Sustain?

Applied Materials’ AMAT gross margin has been experiencing positive momentum for the past four quarters and came in at 49.2% in the second quarter of fiscal 2025, which is also the highest gross margin since the fourth quarter of fiscal 2000. A favorable mix of products and traction in high-margin solutions led to its robust performance.

As the demand for semiconductors used in AI and high performance computing (HPC) is rising, AMAT’s leading-edge logic foundry solutions are also on the rise. Strong demand for AMAT’s Sym3 Magnum etch system, Cold Field Emission eBeam technology, gate-all-around, backside power delivery, and 3D DRAM technology nodes supports margin expansion.

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. Its Sym3 Magnum etch system has generated more than $1.2 billion in revenues since its launch in February 2024.

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. In the second quarter of fiscal 2025, management projected that revenues from its advanced DRAM customers to grow more than 40% in fiscal 2025.

AMAT expects gross margins to remain strong as demand for high-performance computing and AI continues to grow. For the third quarter of fiscal 2025, AMAT has guided a gross margin of 48.3%.

How Competitors Fare Against AMAT

AMAT 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.

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 for the upcoming quarter. It expects to deliver a gross margin of 49.5%, which would be a new record if delivered.

AMAT’s Price Performance, Valuation and Estimates

Shares of Applied Materials have gained 13.3% year to date compared with the Electronics - Semiconductors industry’s growth of 11.5%.

AMAT YTD Price Performance Chart

From a valuation standpoint, Applied Materials trades at a forward price-to-sales ratio of 4.94X, lower than the industry’s average of 8.5X.

AMAT Forward 12 Months (P/S) Valuation Chart

The Zacks Consensus Estimate for Applied Materials’ fiscal 2025 and 2026 earnings implies year-over-year growth of 9.5% and 5.6%, 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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