Applied Materials Reports Record Earnings: But Why Did Shares Decline 5%?

TradingKey - Semiconductors make the world function. And the semiconductor ecosystem is a complex – and global – web of suppliers and manufacturers. One of the key suppliers of semiconductor manufacturing equipment is Applied Materials Inc (NASDAQ: AMAT).

The company delivered record-breaking earnings for its Q1 FY2025 when it released them on Thursday (13 February) after the market closed. But a cautious revenue outlook for the next quarter from Applied Materials sent its shares down 5% in after-hours trading. 

While the semiconductor giant continues to benefit from strong demand for advanced chips driven by Artificial Intelligence (AI), investors appear wary of near-term headwinds. Here's a look at some of the key takeaways for investors. 

Key takeaways from Q1 FY2025 earnings

Applied Materials posted a solid Q1 performance with US$7.2 billion in revenue, a 7% year-on-year increase. Non-GAAP earnings per share rose 12% to US$2.38, and gross margins hit 48.9% – their highest level since 2000. 

The company’s semiconductor systems sales grew 9%, driven by strong demand in foundry logic, which saw 20% growth. Its advanced packaging business also showed strength, capturing more than half of its served market. Additionally, Applied Materials returned US$1.6 billion to shareholders through dividends and share repurchases.

However, the company’s Q2 FY2025 revenue guidance of US$7.1 billion (at the midpoint) fell short of Wall Street’s expectations, raising concerns about near-term growth, particularly in the face of US export restrictions to China. This cautious outlook overshadowed an otherwise strong quarter and led to the after-hours stock drop.

Strengths and opportunities

Despite the market’s reaction, Applied Materials remains a key player in the semiconductor industry’s growth story. The company’s leadership in advanced materials engineering – critical for manufacturing AI chips – positions it well for long-term success.

Applied Materials CEO Gary Dickerson highlighted Applied Materials’ strong foothold in several high-growth areas, including:

• Gate-all-around transistors and backside power delivery for next-gen logic chips
• High-bandwidth memory (HBM) essential for AI data centres
• Advanced packaging solutions that enhance chip performance and energy efficiency
• Power electronics and silicon photonics for data transmission and power management

These technologies are expected to drive future demand, especially as AI adoption expands. Applied Materials’ ongoing investments in these areas, including its EPIC Center for innovation that’s set to open in 2026, signal its commitment to staying ahead of the curve.

Challenges ahead for Applied Materials

The semiconductor industry’s growth is undeniable, but Applied Materials faces immediate hurdles. US export restrictions on semiconductor equipment sales to China are expected to reduce the firm’s full-year FY2025 revenue by US$400 million, with half of that impact hitting in Q2 FY2025.

This is particularly concerning for the company’s Applied Global Services (AGS) segment, which relies heavily on the Chinese market.

Additionally, while the demand for AI chips remains strong, the company acknowledged that investments in certain segments, like ICAPS (IoT, communications, automotive, power, and sensors), are expected to moderate after a period of rapid growth. 

Investors are also watching for how well Applied Materials can navigate a highly competitive landscape, especially as rivals make strides in key technologies like epitaxy (EPI).

What’s next for Applied Materials?

For Q2 FY2025, Applied Materials expects revenue of between US$6.7 billion and US$7.5 billion, representing 7% year-on-year growth but falling short of analyst estimates. The company also anticipates adjusted EPS of US$2.30, a 10% increase from a year ago. 

Despite near-term headwinds, Applied Materials is focused on three strategic priorities, namely expanding its market share in advanced semiconductor manufacturing, doubling its advanced packaging revenue in the coming years as demand for HBM increases, and strengthening collaborations with key industry players through high-velocity co-innovation.

For investors, Applied Materials presents a mixed picture: strong fundamentals and long-term growth potential balanced by short-term uncertainties. 

While its leadership in advanced chip technologies is a significant advantage, near-term headwinds like export restrictions and softer-than-expected guidance warrant careful consideration from investors looking to buy into the stock. In short, patience may be required from long-term investors.