Applied Materials (AMAT) Stock: A Top AI Pick After Record Q3 Results

Despite posting record results for its fiscal third-quarter yesterday evening and providing encouraging guidance, AMAT shares fell 5% in Friday’s trading session. The reaction appears to reflect elevated expectations and some profit-taking after the stock has roughly doubled year to date and has now gained +260% in the last three years.

Of course, investors shouldn’t assume that strong AI demand will automatically produce uninterrupted stock-price gains. Plus, a pullback in AMAT could end up being an appealing buying opportunity, especially for long-term investors.

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Applied Materials' Record Q3 Results

Applied Materials delivered record quarterly revenue of $9.11 billion, a 25% increase from $7.3 billion a year ago and topping Q3 estimates of $8.99 billion. It’s also noteworthy that Applied Materials delivered the highest sequential revenue growth in its history, as quarterly sales spiked nearly 15% from $7.91 billion in Q2. 

Furthermore, Q3 adjusted net income came in at $2.79 billion, or earnings of $3.50 per share, also a quarterly peak. This surged 41% from EPS of $2.48 in the prior year quarter and comfortably exceeded Wall Street’s expectations of $3.38.

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Profitability also improved. Non-GAAP operating margin reached 34%, up 3.3 percentage points, with Semiconductor Systems and Applied Global Services operating margins increasing to 38% and 30%, respectively.

Meanwhile, non-GAAP free cash flow increased 14% to $2.33 billion. The company also generated a record $3.04 billion in operating cash flow and returned $860 million to shareholders through dividends and share repurchases.

Needless to say, these numbers suggest that Applied Materials is not merely generating higher sales from the AI boom; it’s also converting that demand into stronger margins, earnings, and cash flow.

Image Source: Applied Materials Investor Relations

AI Demand is Expanding Beyond Processors

Applied Materials’ opportunity extends well beyond the equipment used to manufacture AI accelerators. Modern AI systems require HBM, more advanced transistors, chiplets, hybrid bonding, and sophisticated packaging technologies that allow multiple components to operate together.

Keeping that in mind, revenue from the company’s Semiconductor Systems division climbed to $7.04 billion from $5.56 billion a year earlier. Dynamic Random Access Memory (DRAM) accounted for 26% of the segment’s revenue, up from a 22% contribution last year, while foundry, logic, and other applications represented 67%.

Management said DRAM revenue—including equipment associated with HBM packaging—grew 52% YoY to a record level. More intriguingly, Applied Materials now expects its overall advanced-packaging revenue to grow by more than 70% during calendar 2026.

That is important because advanced packaging is becoming a critical performance driver for AI computing. When improvements from traditional transistor scaling become more difficult and expensive, chipmakers increasingly rely on packaging, interconnect, and chiplet innovations to increase computing power and energy efficiency.

Applied Materials is positioning itself for these trends with new systems for DRAM, HBM, and advanced packaging that are seeing strong demand from leading semiconductor manufacturers such as Taiwan Semiconductor TSM), Samsung, Micron MU), and SK Hynix SKHY). Notably, its recent product introductions include equipment designed to improve transistor efficiency, copper plating, wafer polishing, defect inspection, and yield control in complex HBM and chiplet structures.

Improving Margins & Services Strengthen the Investment Case

Applied Materials has now recorded 13 consecutive quarters of YoY gross-margin expansion. In the latest quarter, companywide non-GAAP gross margin reached 50.4%, while the Semiconductor Systems division posted a non-GAAP gross margin of 55.4%.

The company is also benefiting from its Applied Global Services business, which provides parts, maintenance, subscriptions, and productivity services for its installed equipment base. During Q3, Services revenue rose to a record $1.78 billion, up 22% year over year, while the segment’s operating margin improved to 30%, as previously mentioned. 

This services operation gives Applied Materials a valuable source of revenue beyond new equipment purchases. As more of its systems are installed in semiconductor factories, Applied Materials gains additional opportunities to sell maintenance, replacement parts, software, and performance-optimization services.

On a trailing twelve-month basis (TTM), you can see that AMAT’s gross margins have spiked to a decade-long peak of roughly 49%.

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Strong Guidance Points to Continued Momentum

Applied Materials expects fiscal fourth-quarter revenue of approximately $10.25 billion, plus or minus $500 million. Adjusted earnings are projected at $4.02 per share, plus or minus $0.20. Both midpoints were above Wall Street's consensus estimates.

Management also raised its expectations for Semiconductor Systems revenue and stated increased customer visibility supports another strong growth year in FY27. The company is expanding its manufacturing capacity to meet projected demand through the end of the decade and aims to support roughly twice its current quarterly Semiconductor Systems output by 2028.

That investment does not guarantee future demand, but it indicates that customers are discussing capacity requirements several years in advance rather than treating AI infrastructure spending as a short-lived cycle.

Investing for Growth While Returning Cash to Shareholders

Applied Materials’ capital allocation strategy balances two priorities: funding the innovation and infrastructure required for long-term growth while returning excess cash to shareholders through dividends and share repurchases. The company’s track record suggests that these goals have been complementary rather than competing.

As referenced in the chart below, over the last 10 fiscal years through FY25, Applied Materials reinvested nearly $25 billion in research and development (R&D) and more than $8 billion in capital additions. This growth-first approach is particularly important in semiconductor equipment, where sustained investment is required to develop new manufacturing technologies and support increasingly complex chip architectures.

As spending on AI processors, HBM and advanced packaging expands, Applied Materials’ R&D and infrastructure investments should help the company maintain its technological relevance and respond to customers’ capacity requirements.

At the same time, Applied Materials has distributed nearly 90% of its free cash flow to shareholders. Its quarterly dividend per share grew at a compound annual rate of approximately 16% over the last 11 years, reaching $0.53 this year. That represents more than double the $0.26 quarterly dividend paid in FY22, highlighting its confidence in cash-generation capacity and commitment to delivering a steadily rising income stream.

Image Source: Applied Materials Investor Relations

Also illustrated in the above chart, share repurchases have been the other major component of the company’s shareholder-return program.

Applied Materials reduced its fiscal year-end share count by approximately 32% between fiscal 2015 and FY25. A smaller share base allows revenue, earnings, and free cash flow to be spread across fewer shares, supporting faster growth in per-share results.

The long-term reduction shown in the chart indicates that repurchases have been a consistent element of the company’s strategy rather than an occasional response to market conditions.

Overall, Applied Materials appears to be using its cash flow in a disciplined order: first investing in research, product development, and operating capacity, and then returning surplus capital through a growing dividend and buybacks.

This combination gives investors exposure to future semiconductor and AI-related growth while also providing tangible shareholder returns.

Bottom Line

Applied Materials combines several qualities that make it stand out among AI-related investments: exposure to advanced logic, HBM, DRAM, and semiconductor packaging; improving margins; a growing services operation; significant free-cash-flow generation; and increasing visibility into customer demand.

Although the stock is neither inexpensive nor risk-free at over $500 a share and 43X forward earnings, its record Q3 results demonstrate that Applied Materials is successfully translating the AI infrastructure boom into higher revenue, profits, and cash flow. For investors seeking diversified exposure to the equipment and materials behind next-generation AI chips, AMAT remains one of the strongest semiconductor stocks to consider and currently sports a Zacks Rank #1 (Strong Buy).

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