Applied Materials: Riding the AI Semiconductor Wave with a Strategic Shift

The semiconductor industry is at the heart of the artificial intelligence (AI) revolution, and Applied Materials (AMAT) stands as a critical enabler of this transformation. As AI-driven demand for advanced chips surges, AMAT's position as a leader in materials engineering solutions for semiconductor manufacturing has never been stronger. Yet, the company's recent strategic shift to reduce reliance on China's volatile market adds another layer of resilience to its growth narrative. With robust financials, a compelling valuation, and tailwinds from tech giants like TSMC, AMAT is primed for significant upside. However, investors must remain mindful of geopolitical risks that could disrupt this trajectory.

AI's Semiconductor Surge: A Tailwind for AMAT

The AI boom is driving unprecedented demand for advanced semiconductors, particularly in high-performance computing (HPC) and memory chips. This has fueled a global capital expenditure (capex) boom in the semiconductor industry, with TSMC alone planning to invest $40 billion in 2025 to expand its leading-edge chip fabrication capacity. As the dominant provider of deposition, etch, and metrology systems for chipmakers, AMAT is a key beneficiary of this spending. Its Semiconductor Systems segment, which accounts for 74% of revenue, reported a 7% year-over-year revenue increase in Q2 2025, driven by AI-driven demand in foundry and logic applications.

Reduced China Dependency: A Strategic Reallocation

AMAT's geographic diversification has been a masterstroke. Revenue from China dropped from 43% of total sales in Q2 2024 to just 25% in Q2 2025, while Taiwan and Korea now account for 50% of revenue. This shift reduces exposure to U.S.-China trade tensions and supply chain disruptions, as seen in the 2022–2023 semiconductor slowdown. The Display segment, once a volatile contributor, also showed resilience with a 45% revenue surge in Q2 2025, underscoring AMAT's ability to leverage emerging markets in flexible OLED and micro-LED displays.

Financial Fortitude Amid Macroeconomic Uncertainty

AMAT's Q2 2025 results were nothing short of stellar: revenue rose 7% to $7.1 billion, while non-GAAP diluted EPS jumped 14% to $2.39. The company generated $1.57 billion in cash from operations and returned $2 billion to shareholders through buybacks and dividends. Despite these achievements, the stock trades at a forward P/E of ~17 (based on the $157.51 share price and Q3 2025 EPS guidance of $2.35), a significant discount to peers like ASML (P/E 36.8) and Lam Research (P/E 23.7). This valuation gap suggests the market has yet to fully price in AMAT's growth catalysts.

Risks on the Horizon

While the AI-driven semiconductor cycle is robust, risks remain. Geopolitical tensions could disrupt global supply chains, particularly as the U.S. tightens export controls on advanced chipmaking tools. Additionally, the Display segment's margins (26% in Q2 2025) are still volatile, and a slowdown in AI adoption or a tech sector correction could temper capex spending. Investors should also monitor TSMC's capex execution, as delays could impact AMAT's order backlog.

Ask Aime: Will AMAT's AI-driven growth outpace geopolitical risks?

Investment Thesis: A Buy with a Strong Upside Catalyst

AMAT's strategic realignment, coupled with its dominance in AI-driven semiconductor innovation, positions it as a standout play on the tech cycle's next phase. At a forward P/E of ~17—well below its five-year average of 21—the stock offers compelling value. With TSMC's capex surge and rising demand for HPC chips, AMAT's backlog should remain robust, supporting earnings growth. While geopolitical risks loom, the company's geographic diversification and operational excellence mitigate these concerns.

Recommendation: Buy AMAT with a 12-month price target of $185, reflecting a 17% upside from current levels. Investors should monitor TSMC's capex trends and geopolitical developments closely, but the fundamental case for AMAT remains solid.

Historically, this strategy has shown promise. Over the past five years, buying AMAT on earnings announcement days and holding for 20 trading days resulted in an average return of 5.2%, with a 68% success rate. While the maximum drawdown reached -12.7% during a tech sector correction in Q3 2022, the strategy has generally outperformed broader market movements, further supporting AMAT's value proposition.

In the race to power AI's future, Applied Materials is not just keeping pace—it's leading the charge.