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The rapid expansion of artificial intelligence (AI) has fueled massive gains for companies producing AI chips such as Nvidia. Many investors naturally look to those chipmakers as the most direct way to benefit from this accelerating trend.
However, firms that supply manufacturing tools, like Applied Materials (NASDAQ: AMAT), are also riding this AI-driven surge. Although its growth pace doesn’t match Nvidia’s explosive rise, Applied Materials has still gained nearly 270% over the past five years, outpacing the S&P 500’s performance. Let’s uncover the reasons behind its success and whether the stock remains appealing.
What Drives Applied Materials’ Business?
Applied Materials ranks among the leading global providers of semiconductor production equipment. In fiscal 2024, which closed last October, 73% of its revenue stemmed from semiconductor systems catering to logic, foundry, and memory sectors.
Another 23% originated from support services that maintain and upgrade chipmaking tools, while 4% came from its display and other adjacent markets. The performance of these divisions has fluctuated over recent years as the semiconductor industry cycled through different phases of demand.
After pandemic-induced growth in 2020 and 2021, Applied Materials experienced a slowdown in fiscal 2022 and 2023. Many chipmakers had overexpanded to meet short-term surges in computing demand, leading to inventory buildups and reduced capital spending afterward.
The memory market’s oversupply, export restrictions on chip sales to China, and ongoing supply chain challenges further strained results. Rising inflation also elevated operating costs, while higher interest rates discouraged fresh investments in chip manufacturing capacity.
But by fiscal 2024 and 2025, the company regained momentum thanks to several tailwinds. A rebound in the memory segment, stabilized logistics, falling borrowing costs, and strong AI adoption reignited revenue and earnings growth across its core businesses.
Can Applied Materials Sustain Its Market Edge?
The broader semiconductor expansion has helped Applied Materials outperform the S&P 500 over the last half-decade. Investor optimism remains high, largely due to its strategic position in the rapidly evolving AI ecosystem.
During the company’s latest earnings call, CEO Gary Dickerson stated that the long-term vision remains steady as nations and corporations race for AI dominance. He noted that the firm stands at critical technological inflection points that enable future AI progress.
Despite that confidence, Applied Materials hasn’t disclosed how much of its income directly stems from AI-oriented clients. It also lags behind competitors like ASML, which commands the high-end lithography equipment space—a faster-growing segment of the market.
For fiscal 2025, analysts predict a 4% increase in revenue and an 8% rise in adjusted earnings per share. In fiscal 2026, those figures are expected to edge up by 3% and 1%, respectively. While stable, these projections appear modest for a company trading at roughly 23 times forward earnings. Its forward dividend yield of 0.8% also limits its appeal to income-focused investors.
Although Applied Materials remains a robust long-term semiconductor play, labeling it purely as an “AI stock” would be misleading. The firm benefits from AI’s rise but still depends heavily on other markets. Stricter export regulations to China—responsible for about 30% of its fiscal 2025 revenue—could also pose fresh uncertainties.
For those considering entry, the stock might still warrant attention, especially if valuations cool slightly. Yet investors seeking a purer AI manufacturing exposure may find stronger opportunities in peers like ASML, which dominates critical lithography technology essential for next-generation chips.