Applied Materials operates on two main segments: Semi Systems, which covers actual manufacturing equipment, and AGS (Applied Global Services), a services business comprising maintenance, spare parts and tool optimization.

This mixed, strategic model helps it amortize the cyclicality inherent in customers' capex. When foundries slow orders for equipment (as is the case today), AGS provides a base of recurring revenue. The company also foresees a low double digit growth for this division by 2026, enough to absorb the near-term softness in Semi systems. This dynamic is far from trivial: it directly supports cash-flow stability, a key element in the long-term valuation of equipment makers.

Recent quarterly results illustrate this complementarity well. While Semi Systems fell 12% Q-o-Q, dragged by a 30% to 35% drop in China, AGS rose modestly sequentially. With a solid non-GAAP gross margin of 48.1% and EPS of $2.17 beating expectations, the company demonstrates its ability to navigate a post-boom digestion environment.

A temporarily lackluster macro but a powerful cycle shaping up

Applied Materials still expects three more weak quarters, in line with the global equipment suppliers' consensus. WFE will remain moderate from Q4 2025 to Q2 2026, not because foundries lack space or scale back ambitions, but due to delayed installation schedules.

Plans by large customers to expand confirm this:

  • Micron does not expect its first equipment deliveries to Boise until H1 2027.
  • SK Hynix and Samsung will run DRAM at high pace between late 2025 and early 2026, with no major acceleration before late 2026.
  • TSMC will see a relatively stable peak for its 2-nm tools in 2025-2026, before focusing growth on Arizona (3-nm) and its A14 pilot.
  • Intel and Samsung Foundry do not yet signal a clear rebound in H2 2026.

In this context, the company projects a nearly flat fiscal 2026 first half, followed by explosive growth in H2. For the FY, this translates to about +5% growth, slightly below the +10% expected for the WFE market.

This relative delay is not a structural handicap: it simply reflects a slower normalization of the technology mix addressed by the American company. But it is precisely in H2 2026 that the dynamics could shift in nature.

Structural drivers: GAA, hybrid bonding, backside power and DRAM/HBM

The company holds a strategic position in the technologies that will dominate the decade.

  • GAA (Gate-All-Around), essential for 2-nm nodes and beyond, represents a major investment driver for TSMC, Samsung and Intel. Applied Materials, thanks to its high-intensity deposition and etching tools, is one of the key suppliers.
  • Hybrid bonding, at the heart of 3D packaging and HBMs, is another growth vector. Technological transitions (HBM3e to HBM4 then HBM4e) require specialized equipment where Applied Materials holds a dominant position.
  • Backside power delivery, an architectural shift adopted to improve energy efficiency of advanced chips, strengthens the company's exposure to 3-nm and 2-nm nodes.

These technological pillars are precisely those expected to see investment accelerate from the second half of 2026, making the company a mechanical beneficiary of the cycle.

Die manufacturing spend is projected to grow over 20% in 2026 (reaching about $136.5 billion, then $145bn in 2027 according to UBS estimates), with more than half of this rise coming from DRAM, a segment where the company is the world's second supplier after ASML.

The market appears to be massively underestimating Chinese demand for 2026 equipment, which would provide a powerful uplift after two years of digestion.

China factor: from headwind to discreet support

China has long weighed on AMAT's results, particularly via the Semi Systems division. The normalization of 2024-2025 sales led to a notable shift in the company's favorable mix. But this period is ending.

Applied Materials expects Chinese contribution to gradually return to normal levels (around 25% of revenue), consistent with pre-boom years.

The suspension of export-affiliate rules constitutes a key element: it allows the company to recover about $600m in additional revenue in 2026, a sizable amount in a context of moderate growth.

Thus, China's impact is no longer a structural drag but a stabilizing factor that amplifies the global upturn. This marks a major shift in the investment narrative around the stock.

A better-balanced financial profile: margins resuming, services expanding, clearer visibility

Even as Semi equipment sales to China fall 30% to 35% Q-o-Q, the company manages to keep gross margin around 48%, supported by ongoing price and cost management.

Guidance for the January quarter contemplates a slightly higher margin, at 48.4%, a level expected to persist into H1 2026. This confirms a structural trend: profitability improving despite a still-unfavorable mix, a very positive signal for future valuation of the stock.

Meanwhile, AGS services-already described as cycle cushions-will enter 2026 with solid momentum. Low double-digit growth is expected, underpinning revenue visibility and reinforcing the company's ability to invest without harming margins.

Valuation still reasonable given the cycle ahead

The optimistic view I defend highlights the potential market-share gains and the market's persistent underestimation of Chinese demand. This suggests upside revisions to profits and potential outsized gains beyond the company's stated targets. In other words, the stock may not fully reflect the improvement in fundamentals pointing to a marked acceleration in 2026-2027.

The semiconductor market is reinventing itself at the pace of disruptive innovations: HBM, 2-nm nodes, GAA, 3D packaging, backside power. Each of these revolutions requires ever-more sophisticated equipment, and Applied Materials sits precisely at that crossroads.