Semiconductor machinery manufacturer Applied Materials (NASDAQ: AMAT) beat Wall Street’s revenue expectations in Q2 CY2025, with sales up 7.7% year on year to $7.30 billion. On the other hand, next quarter’s revenue guidance of $6.7 billion was less impressive, coming in 8.2% below analysts’ estimates. Its non-GAAP profit of $2.48 per share was 5.1% above analysts’ consensus estimates.

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“Applied Materials delivered record performance in our third fiscal quarter, and we are on track to deliver our sixth consecutive year of revenue growth in fiscal 2025,” said Gary Dickerson, President and CEO.

Company Overview

Founded in 1967 as the first company to develop tools for other businesses in the semiconductor industry, Applied Materials (NASDAQ: AMAT) is the largest provider of semiconductor wafer fabrication equipment.

Revenue Growth

A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Applied Materials grew its sales at a solid 12% compounded annual growth rate. Its growth beat the average semiconductor company and shows its offerings resonate with customers, a helpful starting point for our analysis. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

Long-term growth is the most important, but short-term results matter for semiconductors because the rapid pace of technological innovation (Moore's Law) could make yesterday's hit product obsolete today. Applied Materials’s recent performance shows its demand has slowed as its annualized revenue growth of 3.8% over the last two years was below its five-year trend.

This quarter, Applied Materials reported year-on-year revenue growth of 7.7%, and its $7.30 billion of revenue exceeded Wall Street’s estimates by 1.2%. Beyond the beat, this marks 6 straight quarters of growth, showing that the current upcycle has had a good run - a typical upcycle usually lasts 8-10 quarters. Company management is currently guiding for a 4.9% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 4.5% over the next 12 months, similar to its two-year rate. This projection is underwhelming and indicates its newer products and services will not accelerate its top-line performance yet. At least the company is tracking well in other measures of financial health.

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Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business’ capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, Applied Materials’s DIO came in at 141, which is 2 more days than its five-year average. These numbers suggest that despite the recent decrease, the company’s inventory levels are slightly above the long-term average.

Key Takeaways from Applied Materials’s Q2 Results

It was good to see Applied Materials beat analysts’ EPS expectations this quarter. We were also glad its adjusted operating income outperformed Wall Street’s estimates. On the other hand, its revenue and EPS guidance for next quarter both missed. This is weighing on shares, and the stock traded down 11% to $167.40 immediately after reporting.

Is Applied Materials an attractive investment opportunity at the current price? We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.