TipRanks Smart Value #28: Applied Value

Shrilekha Pethe on September 16, 2025

Dear Investors,

Welcome to the 28^th edition of our recently launched TipRanks Smart Value Newsletter!

This Week’s Top Value Pick: Applied Materials (AMAT)

Applied Materials (AMAT) is a leading global provider of semiconductor manufacturing equipment, services, and software. The company develops and supplies advanced materials engineering solutions used to produce chips and displays, serving customers across the semiconductor, display, and related industries. With operations in more than 100 locations worldwide, Applied Materials leverages its deep expertise in materials science, precision engineering, and automation to drive innovation in electronics manufacturing. Its diversified portfolio, spanning deposition, etch, metrology, inspection, and packaging technologies, positions the company as a critical enabler of next-generation semiconductors and a key player in powering the growth of the global electronics ecosystem.

Engineering Legacy

Applied Materials was founded in 1967 in Santa Clara, California, as a supplier of chemical vapor deposition systems to the emerging semiconductor industry. Its early success came from developing tools that supported smaller, more powerful integrated circuits, placing the company at the heart of Silicon Valley’s tech boom. During the 1980s and 1990s, Applied expanded aggressively worldwide, building manufacturing and service operations across Asia and Europe to serve rising chip demand fueled by personal computers and consumer electronics.

In the late 1990s and early 2000s, Applied broadened its product portfolio beyond deposition into etch, planarization, and inspection tools, supported by sustained R&D and targeted acquisitions. This diversification transformed it from a single-product supplier into a full-suite semiconductor equipment provider, increasing its share of customer capital spending and reducing exposure to industry cycles.

The 2010s marked another turning point as the company became a major supplier of organic light-emitting diode (OLED) and liquid crystal display (LCD) production equipment while expanding its Applied Global Services arm to offer upgrades, spares, and automation software. These moves created recurring revenue streams from its installed base and reduced reliance on new equipment orders.

Applied Materials has a long history of using acquisitions and strategic investments to strengthen its position in semiconductor manufacturing equipment. However, in recent years, Applied has focused on targeted deals aligned with its roadmap. In 2022, it acquired Picosun Oy, a pioneer in atomic layer deposition (ALD) tools, strengthening its position in specialty foundry-logic markets for Internet of Things (IoT), automotive, and communications chips. More recently, Applied has leveraged its strength in materials engineering to support next-generation technologies such as artificial intelligence (AI), 5G, and advanced packaging. In 2025, it became the largest shareholder of BE Semiconductor Industries (BESI) with a 9% stake, gaining access to BESI’s hybrid bonding technology used in advanced chip packaging and 3D integration.

Through a blend of internal R&D and strategic acquisitions, Applied Materials has steadily broadened its technology portfolio, positioning itself at the center of major industry shifts in logic, memory, and packaging – a strategy that has helped it become the world’s largest semiconductor equipment provider and cement its long-term growth and competitive edge.

Alloyed Arsenal

Applied Materials plays a central role in the global semiconductor industry, supplying the precision tools required to build advanced chips at atomic dimensions. Its equipment supports nearly every stage of chipmaking – from forming transistors and connecting circuits to inspecting quality and packaging finished chips – positioning the company to benefit as customers adopt new architectures and push the limits of performance, speed, and energy efficiency.

Its business spans three main segments, including Semiconductor Systems, Applied Global Services (AGS), and the Display segment. Semiconductor Systems is AMAT’s largest business, contributing about 74% of total revenue. This segment produces a broad range of chipmaking tools, including etch, deposition, and inspection systems, covering all major steps of semiconductor fabrication.

In the latest reported quarter, Semiconductor Systems generated $5.43 billion in revenue, up 10% year-over-year, with an operating margin of 36.4%, up 140 basis points. Growth was driven by strong demand from foundry and logic customers ramping gate-all-around (GAA)¹ transistors at advanced (leading edge) nodes, partly offset by weaker spending in its ICAPS business, which serves older-generation chips used in Internet of Things (IoT), communications, automotive, power, and sensor markets.

Memory demand strengthened, with dynamic random-access memory (DRAM) sales rising on AI-related technologies and flash memory (NAND) surging on orders from China-based multinationals. Metal deposition revenue reached about $1.2 billion, while etch surpassed $1 billion for the first time ever. About 69% of segment sales came from foundry and logic customers, while 31% were tied to the more cyclical memory market, which appears poised for recovery as demand for high-bandwidth memory (HBM) and energy-efficient memory is on a rebound.

Applied Global Services (AGS) segment supports chipmakers worldwide by providing services, spare parts, and factory automation software that keep their fabrication plants running efficiently. AGS also sells 200mm and other older-generation tools mainly used in mature, non-leading-edge markets. Its offerings – delivered through a mix of transactional and subscription models – help customers maintain and improve the performance of Applied’s large global installed base of semiconductor, display, and other equipment.

In fiscal Q3 2025, AGS generated $1.6 billion in revenue, up 1% year-over-year, with a 27.8% operating margin that dipped 180 basis points due to customer mix. Growth was driven by record core services revenue, which rose 10% on strong tool utilization at leading-edge foundry-logic fabs and high-bandwidth memory lines, as well as more tools covered under comprehensive service agreements. While sales of 200mm equipment declined, AGS has now delivered 24 consecutive quarters of year-over-year service growth, with over 66% of its service revenue coming from subscriptions – a share expected to rise further.

Display supplies equipment for advanced display technologies used in TVs, monitors, laptops, tablets, smartphones, and other consumer devices. Demand is fueled by preferences for larger, thinner, and higher-resolution screens, new form factors such as curved and flexible displays, and emerging use cases in augmented reality (AR) and virtual reality (VR).

The Display segment generated $263 million in revenue in FQ3, with a 23.6% operating margin, marking its second consecutive quarter of growth as panel makers invested in organic light-emitting diode (OLED) capacity to meet demand for next-generation mobile and IT displays.

Across these businesses, Applied Materials’ portfolio is closely aligned with the semiconductor industry’s most capital-intensive developments – including GAA transistors, backside power delivery, HBM, and advanced packaging – structural shifts that favor integrated, materials-intensive approaches and increase the company’s share of customer spending within fabs.

1- GAA marks the next major transistor architecture after FinFET, enabling greater performance, scaling, and energy efficiency in leading-edge chips. A FinFET transistor is a three-dimensional (3D) field-effect transistor design that replaces traditional planar channels with thin vertical fins, allowing the gate to wrap around the channel on multiple sides and providing superior electrostatic control for enhanced performance and reduced leakage current.

Material Resilience

Applied Materials is navigating a mixed near-term environment shaped by macroeconomic uncertainty, trade restrictions, and shifting customer demand. In the most recent quarter, China accounted for about 35% of AMAT’s revenue, but sales from the region are expected to decline as chipmakers work through excess capacity built up from heavy 2023–2024 equipment shipments. Management noted this “capacity digestion” phase could last several quarters, with reduced visibility potentially extending into 2026. Reflecting this uncertainty, the company’s fourth-quarter guidance assumes no new approvals for its large backlog of export license applications.

Demand from leading-edge foundry and logic customers has also been uneven. Orders fell short of expectations in Q3, largely due to demand being concentrated among a small group of customers and delays in fab construction timelines. This prompted AMAT to lower its 2025 gate-all-around (GAA)-related spending forecast from about $5 billion to just over $4.5 billion. Looking beyond near-term softness, AMAT outlined preliminary expectations for fiscal 2026, including about $500 million from leading-edge investments, and further upside from other regions. The company’s management has emphasized that while near-term volatility and geopolitical risks persist, long-term growth drivers remain intact, led by accelerating demand from AI businesses.

The U.S. and other Western governments are incentivizing domestic chip production, such as Apple’s American Manufacturing Program,² where Applied is one of the key contributing partners. AMAT is also investing over $200 million in its new Arizona facility, building on more than $400 million in U.S. investments over the past five years. With artificial intelligence reshaping many industries – and first and foremost chipmaking – AMAT is capitalizing on resurgence of materials science and engineering as pillars of technological advancement. Major technology inflections like the transition from FinFET to GAA transistors, high-performance DRAM, HBM stacking, advanced packaging, and power electronics are helping AMAT expand its addressable market, positioning it for future market share gains.

To capitalize on these trends, AMAT is accelerating its “high-velocity co-innovation” approach to accelerate semiconductor technology development by collaborating closely with customers from the earliest R&D stages. Through its EPIC platform, AMAT integrates equipment, process, and materials engineering in one environment, allowing new chip architectures to be developed in parallel with customer designs. A new EPIC Center, set to open in spring 2026, will further support this effort by enabling closer collaboration with customers and partners to speed next-generation semiconductor development.

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2- Apple’s American Manufacturing Program (AMP) is a major initiative launched in 2025, committing $600 billion over four years to reshape its domestic supply chain by investing in U.S.-based manufacturing, job creation, and local innovation.

Solid Momentum

Applied Materials has delivered strong and consistent growth in recent years, driven by its leadership in semiconductor manufacturing equipment and sustained demand from foundry and logic customers building advanced chips. Over the past five years, the company’s revenue has grown at a CAGR of 12%, while EPS has risen even faster by 19.5%. Robust investments across the semiconductor industry have fueled this performance, as customers shifted to leading-edge logic nodes, HBM, and advanced packaging technologies that support artificial intelligence (AI) workloads and energy-efficient computing.

In the fiscal third quarter of 2025, AMAT reported record revenue of $7.30 billion, up 8% year-over-year and ahead of consensus estimates. Adjusted EPS rose 17% to $2.48, also surpassing analyst forecasts. Profitability improved, with gross margin expanding 150 basis points to 48.9% and adjusted operating margin climbing to 36.4% from 35% a year earlier, reflecting strength in both foundry-logic and memory demand.

However, the company issued softer guidance for the fourth quarter, reflecting the near-term challenges outlined earlier. In fiscal Q4, AMAT is projecting revenue of $6.7 billion (±$500 million) and adjusted EPS of $2.11 (±$0.20). This outlook was below Wall Street’s estimates of $7.3 billion in revenue and $2.38 in EPS and reflects near-term headwinds. While management acknowledged limited visibility in the near term, it continues to expect long-term growth driven by major technological transitions outlined earlier, fueled by accelerating AI demand.

AMAT maintains a solid financial foundation to support these growth ambitions. As of Q3 FY2025, the company reported $19.5 billion in equity and $6.3 billion in total debt, resulting in a debt-to-equity ratio of about 0.32x. While slightly above the sector median, this reflects the company’s deliberate use of leverage to fund growth in a capital-intensive industry. Backed by strong earnings, cash flows, and disciplined capital allocation, S&P Global assigns AMAT an “A” long-term credit rating, underscoring its robust financial profile and leading competitive position.

Surface Value

AMAT generated robust cash flows in the third quarter of fiscal 2025, underscoring its strong earnings power and financial flexibility. The company reported operating cash flow of $2.63 billion, up from $2.39 billion in the same quarter last year, supported by higher net income and improved working capital. Capital expenditure rose to $584 million from $297 million a year earlier as the company continued investing in manufacturing capacity and technology upgrades. Even with this increased spending, Applied delivered adjusted free cash flow of about $2.05 billion, reflecting its ability to convert strong operating profits into liquidity while funding growth initiatives. This healthy cash generation gives the company ample capacity to support shareholder returns through dividends and buybacks while sustaining long-term investments, even as it navigates near-term demand fluctuations in the semiconductor market.

Applied Materials has built a long track record of returning cash to shareholders through a combination of dividends and share repurchases, supported by strong cash flows and a solid balance sheet. The company has paid dividends consistently since 2005 and has raised its payout for eight consecutive years. In the most recent quarter, AMAT announced a dividend of $0.46 per share, a 15% increase from $0.40 in the previous quarter. Over the past five years, its dividend has grown by about 15.7%. Based on adjusted earnings, the company distributes roughly 18% to shareholders and offers a dividend yield of 1.03%, well above the technology sector average of 0.58%.

Alongside dividends, AMAT has been active in share repurchases. In the third quarter of fiscal 2025, it returned about $1.4 billion to shareholders through a combination of dividends and buybacks, with approximately $14.8 billion still authorized for future repurchases. This disciplined capital return strategy underscores management’s confidence in the company’s long-term earnings power, even as it faces near-term headwinds.

Despite these shareholder-friendly measures, AMAT’s stock has declined around 7% over the past year, pressured by softer guidance for the upcoming quarter. This has dampened investor sentiment, even as long-term growth, particularly in AI, remains intact.

Valuation metrics suggest that Applied Materials is trading at a meaningful discount. The stock currently trades at more than a 25% discount to the sector median on non-GAAP trailing and forward P/E and over 20% below on trailing EV/EBITDA. It is also priced below its own historical averages, based on non-GAAP trailing and forward P/E as well as trailing EV/EBITDA and price-to-book ratios. Despite this, its non-GAAP forward PEG ratio appears elevated compared to its sector median, reflecting broader market expectations for a multi-year rebound in semiconductor equipment demand across AI, data center, and advanced packaging markets.

Although AMAT trades at a relatively low P/E, which makes the stock look inexpensive on current earnings, its higher PEG ratio points to tempered growth expectations as earnings come off cyclical highs. This mismatch stems from the semiconductor industry’s cyclical nature, not from structural weakness. The company continues to generate robust free cash flows and maintain healthy margins, allowing it to invest in next-generation semiconductor and AI-related equipment that could drive future growth. The low P/E also indicates that much of the market’s caution is already priced in, providing a margin of safety. If earnings reaccelerate as industry demand rebounds, the PEG ratio should normalize, positioning AMAT as a compelling value play rather than a value trap.

Relative to peers like Lam Research and KLA Corporation, AMAT trades near the lower end of valuation ranges on non-GAAP trailing and forward P/E, EV/EBITDA, price-to-book, and price-to-cash-flow multiples, reinforcing its appeal as an undervalued opportunity in a sector poised for recovery. A discounted cash flow (DCF) analysis suggests the stock may be undervalued by about 11%.

Analysts on Wall Street remain broadly optimistic about Applied Materials, citing its growing role in supplying the specialized equipment needed to build the next generation of AI-optimized chips – from cutting-edge logic devices to advanced memory and packaging solutions. Consensus estimates imply roughly 16% upside for the stock, with some projecting gains of more than 40% from current levels.

Investing Takeaway

Applied Materials offers a compelling value proposition for long-term investors, underpinned by its strong market position, diversified portfolio, and disciplined capital strategy. The company has steadily evolved from a niche equipment supplier into the world’s largest semiconductor manufacturing equipment provider, anchored by deep expertise in materials engineering and close ties with leading chipmakers. While near-term headwinds have weighed on sentiment, its resilient cash flows, ongoing investments, and history of shareholder returns demonstrate financial strength. The company’s strategic focus on enabling next-generation technologies positions it to capture long-term industry tailwinds. With its shares trading at a discount to peers and historical levels, the market appears to be underestimating AMAT’s earnings power and growth potential, creating an attractive entry point for investors seeking value in the semiconductor space.

Category: Smart Value