The AI Buildout Is Turning Applied Materials (AMAT) Into A Profit Machine

Applied Materials (AMAT) experienced its largest quarter-over-quarter revenue increase in history, rising to $9.12 billion, a 25% increase year-over-year, accompanied by a 41% jump in non-GAAP earnings per share to $3.50. The company's main constraint is not customer acquisition, but rather its inability to build fast enough to meet demand.

Management argues that demand for advanced chips is outpacing industry supply, leading to longer customer orders, some extending to 2030, and over 10 new fab projects announced in the quarter. DRAM revenue, boosted by high bandwidth memory packaging, grew 52% year-over-year to a record, and advanced packaging is projected to grow more than 70% in 2026 as chipmakers adopt 3D chiplet stacking.

Applied Materials formed 11 EPIC innovation partnerships, including with Broadcom, and process diagnostics and control revenue is set to grow more than 50% this year. Non-GAAP gross margin hit 50.4%, marking the 13th consecutive quarter of year-over-year expansion, while operating margin reached a record 34%. The company expects revenue of $10.25 billion in the next quarter, a 51% increase from the previous year.

However, this growth comes with costs, including a projected tax rate increase to 13% in 2027, ramp costs due to new hires, and a longer fiscal quarter in 2027. Additionally, clean room space constraints for tool deliveries and potential changes in China's export rules could pose challenges. Hedge fund interest in AMAT remains stable, and the stock trades at a forward P/E of 27.17, indicating investor confidence in the current growth trajectory.

Despite these factors, the company now has unprecedented demand visibility and expanding margins, but the success of this growth will depend on effective execution of its AI-driven capacity boom.