AMAT Q1 Earnings Call: Revenue Misses, Margins and AI-Driven Demand Shape Outlook

Semiconductor machinery manufacturer Applied Materials (NASDAQ: AMAT) fell short of the market’s revenue expectations in Q1 CY2025, but sales rose 6.8% year on year to $7.1 billion. Its non-GAAP EPS of $2.39 per share was 3.4% above analysts’ consensus estimates.

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StockStory’s Take

Applied Materials’ first quarter performance was shaped by increased investments in leading-edge foundry and logic, as well as continued demand for semiconductors used in artificial intelligence (AI) applications. CEO Gary Dickerson highlighted the company’s focus on enabling next-generation technologies such as gate-all-around transistors and advanced DRAM, stating, “We are very well-positioned at major technology inflections in fast-growing areas of the market.” Despite challenges from trade restrictions, especially in China, Applied Materials saw broad-based growth across business segments, with the Semiconductor Systems segment benefiting from customers’ accelerated adoption of new chip architectures. The company also cited gains in its advanced etch and process diagnostics products as contributors to margin expansion.

Looking ahead, Applied Materials’ guidance is underpinned by anticipated acceleration in leading-edge foundry-logic and continued strength in DRAM and NAND upgrades, particularly those tied to AI data center investments. CFO Brice Hill explained, “We expect the core [services] to grow at low double digits during the year, even with the impacts from lower China business due to trade restrictions.” Management emphasized the durability of demand for AI-enabling semiconductor technologies and highlighted ongoing investments in new product innovation and high-velocity co-innovation with customers. The company cautioned that macroeconomic volatility, tariffs, and evolving trade policies remain risks to its outlook, but maintained that its diversified manufacturing and supply chain footprint provide flexibility to navigate these challenges.

Key Insights from Management’s Remarks

Management pointed to robust demand for AI-related semiconductor technologies and highlighted recent product advances, while acknowledging near-term headwinds from China trade restrictions and segment-specific softness.

• AI and advanced logic demand: Growth was driven by strong customer investments in advanced logic and DRAM technologies, with particular emphasis on AI data center applications and high-bandwidth memory, which management expects to be major market drivers for the next several years.
• China trade restrictions’ impact: The company experienced continued headwinds in China, especially in its services and 200-millimeter equipment business, due to expanded U.S. export controls. Management noted these restrictions led to weaker near-term performance for Applied Global Services (AGS) but expects core service revenue (excluding 200mm) to grow at low double digits through the year.
• Product innovation and adoption: New products, including the Sym3 Magnum etch system and Cold Field Emission eBeam technology, have seen rapid market adoption, supporting revenue growth and margin improvement. The Sym3 Magnum generated over $1.2 billion in revenue since its launch in February 2024.
• Margin improvement initiatives: Profitability benefited from favorable product mix, ongoing cost management, and value-based pricing strategies. Management believes recent cost improvements and better value capture will support sustainable margin expansion in future periods.
• Diversified manufacturing and supply chain: Applied Materials leveraged its global supply chain flexibility to mitigate the effects of tariffs and supply chain disruptions. The company’s ability to shift production and duplicate sources globally has limited the near-term financial impact from changing trade policy and geopolitical risks.

Drivers of Future Performance

Applied Materials’ forward outlook is shaped by accelerating AI-related demand, ongoing product innovation, and the company’s ability to manage external risks such as tariffs and trade dynamics.

• AI-driven semiconductor investments: Management expects continued robust demand for advanced logic, DRAM, and packaging solutions supporting AI infrastructure, with leading-edge foundry-logic acceleration set to offset weakness in mature ICAPS segments. Investments by cloud service providers and leading chipmakers are projected to drive sustained growth in wafer fab equipment.
• Service segment growth and recurring revenue: The company anticipates core service revenues, excluding 200-millimeter equipment, will grow at a low double-digit rate, supported by an increasing share of subscription-based agreements and recurring business. However, trade restrictions in China are expected to limit growth in certain service and equipment categories in the near term.
• Margin resilience amid external pressures: Management highlighted ongoing margin expansion efforts through cost control, pricing discipline, and flexible manufacturing. While tariffs and macroeconomic volatility present ongoing risks, the company expects operating margins to remain in the low-48% range, with further improvements possible through operational initiatives.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will focus on (1) the pace of adoption for new AI-related semiconductor technologies and the resulting impact on leading-edge foundry and logic revenue, (2) whether service segment growth can maintain momentum despite ongoing China trade restrictions and 200mm equipment headwinds, and (3) progress toward sustainable margin expansion through cost management and product mix. The continued ramp of advanced packaging and further penetration of subscription-based services will also be key indicators of execution.

Applied Materials currently trades at a forward P/E ratio of 17.2×. In the wake of earnings, is it a buy or sell? Find out in our full research report (it’s free).

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