Applied Materials' Valuation Divergence and the Semiconductor Equipment Sector's Long-Term Promise

Applied Materials (AMAT) has underperformed relative to the broader semiconductor equipment sector in recent months, despite reporting robust financial results for its third quarter of fiscal 2025. This divergence raises critical questions about valuation dynamics and the interplay between short-term headwinds and long-term growth potential in a market poised for expansion.

A Tale of Two Realities

Applied Materials' Q3 2025 results were nothing short of stellar. Revenue surged 8% year-over-year to $7.3 billion, driven by surging demand for DRAM and leading-edge logic semiconductor systems, according to Applied Materials' Q3 results. Non-GAAP earnings per share (EPS) hit a record $2.48, up 17% from the prior year, reflecting the company's dominant position in critical segments of the semiconductor value chain, as the Q3 release showed. Yet, despite these achievements, its stock price has lagged behind the sector's rally. As of October 2025, AMAT trades at a P/E ratio of 26.85 and an EV/EBITDA of 19.80, both below the Semiconductor Equipment & Materials industry average of 29.88, the Q3 release noted. This discount suggests a disconnect between the company's fundamentals and market sentiment.

The gap is partly attributable to management's cautious guidance for Q4 2025. Revenue is expected to dip to $6.7 billion, and non-GAAP EPS to $2.11, as capacity digestion in China, export license backlogs, and non-linear demand from leading-edge customers temper near-term optimism, the company warned in its guidance. Such volatility is par for the course in capital-intensive industries, yet it has amplified skepticism about AMAT's ability to sustain its momentum.

Valuation Divergence and Sector Context

To understand this underperformance, one must contextualize AMAT's valuation within the broader semiconductor equipment landscape. The sector's average P/E of 29.88 implies a premium over AMAT's 26.85, even as the company outperformed peers in earnings growth, a point the Q3 results emphasized. This discrepancy hints at a market that is selectively pricing in risks-particularly those tied to geopolitical bottlenecks and cyclical demand shifts-while underestimating AMAT's structural advantages.

Consider the broader semiconductor industry, which trades at a P/E of 60.6x as of October 2025, according to a Mordor Intelligence report. This stark premium reflects the sector's exposure to AI-driven demand and government-led manufacturing expansions, both of which are central to AMAT's strategy. The company's 49.2% gross margin and 30.7% operating margin in Q2 2025 underscore its profitability resilience, yet its valuation remains anchored to a lower multiple than its peers, as shown in the Applied Materials Q2 slides. This suggests that investors are either discounting AMAT's long-term prospects or overemphasizing near-term challenges.

Long-Term Growth: A Case for Rebalancing

The semiconductor equipment market is projected to grow at a compound annual rate of 8.1% through 2030, driven by AI, advanced packaging, and U.S. manufacturing incentives, the Mordor Intelligence report projects. AMAT is uniquely positioned to benefit from these trends. Its leadership in photolithography and deposition systems-critical for sub-5nm chip manufacturing-aligns with the industry's shift toward AI and high-performance computing, as indicated by AMAT financial ratios. Moreover, the U.S. government's CHIPS Act and similar initiatives globally are expected to fuel capital expenditures in semiconductor fabrication, a domain where AMAT holds a commanding market share.

The company's recent strategic investments in AI-driven semiconductor technologies further reinforce its growth narrative. With a P/B ratio of 9.30, AMAT commands a premium over its book value, reflecting investor confidence in its intangible assets and R&D pipeline, according to StockAnalysis. Yet, this premium is still lower than the sector's average, suggesting untapped value. Analysts have upgraded AMAT's price targets - a WallStreetZen article lists a one-year target of $200.25 implying a 7.84% upside from its October 2025 price of $185.69.

Risks and the Path Forward

Short-term risks remain. Export license delays and China's capacity digestion could prolong Q4's softness, while macroeconomic uncertainties may dampen capex spending. However, these are cyclical rather than structural. The global semiconductor equipment market, valued at $110.48 billion in 2024, is expected to reach $175.17 billion by 2030, the Mordor report estimates. AMAT's ability to navigate these cycles-coupled with its dominant market position-positions it to outperform in the medium to long term.

For investors, the current valuation divergence presents an opportunity. AMAT's P/E of 26.85 is a 23% discount to its 10-year average of 34.81, suggesting undervaluation relative to historical norms, according to StockAnalysis. Meanwhile, its EV/EBITDA of 19.80 is significantly lower than the broader semiconductor industry's 60.6x, indicating a mispricing of its growth potential, per the Mordor report.

Conclusion

Applied Materials' underperformance in a rising market is a symptom of near-term volatility and selective risk discounting. Yet, its strong financials, strategic alignment with AI and U.S. manufacturing, and undervalued metrics relative to peers and the broader sector suggest that the market is underappreciating its long-term potential. As the semiconductor equipment industry enters a growth phase, AMAT's ability to leverage its technological and market advantages could drive a re-rating of its valuation. For patient investors, this divergence may prove to be a compelling entry point.