Is Applied Materials Stock a Buy After Its Q4 Earnings Beat?

Applied Materials (AMAT) just delivered strong fourth-quarter (Q4) results that beat Wall Street's expectations. However, the stock has come under pressure due to the company’s cautious guidance for the first quarter of fiscal 2025.

AMAT provides manufacturing equipment, services, and software for the semiconductor, display, and related industries. It is witnessing high demand for advanced equipment used in artificial intelligence (AI) chip production. However, a slowdown in other segments - particularly its Display business - is dampening the company’s growth momentum.

Let’s unpack the Q4 numbers and explore whether Applied Materials stock is worth adding to your portfolio.

AMAT: Q4 Highlights

Applied Materials posted revenue of $7.05 billion in Q4, reflecting a 5% year-over-year increase and surpassing analysts' expectations of $6.97 billion.

Breaking it down by segment:

• Semiconductor Systems: This division generated $5.18 billion, up 6% year-over-year, driven by robust demand for advanced foundry-logic chips.
• Applied Global Services (AGS): Revenue hit a record $1.64 billion, marking an 11% increase year over year. Growth in services fueled this gain, although a dip in sales of 200mm equipment slightly offset the momentum.
• Display Business: Revenue was $211 million, reflecting weakness in end-market demand and subdued customer investment levels.

On the profitability front, AMAT's adjusted gross margin rose to 47.5%, a modest improvement compared to the previous quarter and last year. Operational efficiencies and a favorable product mix helped offset headwinds, including lower sales in China.

The company’s adjusted earnings per share (EPS) were $2.32, up 9% year-over-year and well ahead of the consensus estimate of $2.18. Improved margins, higher interest income, a lower effective tax rate, and share repurchases fueled this earnings growth.

Overall, the company ended fiscal 2024 on a solid note, generating record revenue and earnings and distributing over $5 billion to its shareholders through dividends and share buybacks.

Factors to Support Applied Materials Stock

Applied Materials is poised to gain from the semiconductor industry's AI-driven transformation. As AI technologies demand unprecedented advancements in computing power and energy efficiency, AMAT’s portfolio of technologies supports these transitions by offering integrated solutions.

Applied Materials’ integrated solutions streamline key processes like material deposition, etching, and modification. These solutions help semiconductor manufacturers achieve their energy-efficiency goals while improving performance. Integrated solutions account for roughly 30% of AMAT's Semiconductor Systems revenue, and this share is expected to grow as demand rises.

Another bright spot for AMAT is its services segment, which has been driving consistent growth. The company provides advanced service products designed to simplify the complexities of research, development, and large-scale manufacturing. Much of the services segment revenue comes from long-term, subscription-based contracts with high renewal rates.

AMAT hit a milestone this year by signing its first five-year service agreements with several customers. These long-term deals add to the stability of its revenue streams. AMAT's Applied Global Services (AGS) division has delivered 21 consecutive quarters of year-over-year growth, including a record-breaking performance in the most recent quarter.

The semiconductor industry is witnessing higher adoption of gate-all-around (GAA) transistors. In fiscal 2024, AMAT generated over $2.5 billion in revenue from GAA-related products, and expects this figure to double by 2025. As GAA adoption grows, AMAT’s addressable market expands, creating more growth opportunities.

Applied Materials is also making strides in the DRAM market, particularly in high-bandwidth memory (HBM), which is critical in modern computing. Over the past decade, the company has increased its DRAM market share by about 10%. In fiscal 2024, AMAT’s DRAM revenue grew by an impressive 60% year-over-year.

Looking ahead, the next generation of DRAM architectures, such as 4F-squared and 3D DRAM, will push the boundaries of materials engineering. AMAT is well-prepared to capitalize on these advancements, unlocking new avenues for growth.

The Takeaway on AMAT Stock After Earnings

Applied Materials continues to benefit from surging demand for AI-related semiconductor equipment, positioning it well for long-term growth. However, challenges in the Display business and a cautious outlook for the upcoming quarter may limit near-term gains.

For short-term investors, waiting for clearer trends in 2025 might be wise. Long-term investors could consider buying on dips, as AMAT is well-positioned to thrive in the evolving semiconductor market.

Wall Street analysts currently rate the stock as a “Moderate Buy.”