The Business Model (How They Make Money)

Applied Materials, Inc. (AMAT) is like the essential toolkit provider for the digital world. They design, make, and sell the highly specialized equipment and software that chipmakers and display manufacturers need to create the advanced semiconductors and screens found in everything from your smartphone to powerful AI servers. Think of them as the company that builds the factories that build the chips.

Their business is primarily divided into three main areas:

1. Semiconductor Systems: This is their biggest money-maker. In fiscal year 2025, this segment brought in $20.80 billion, which was about 73.32% of their total revenue. This part of the business sells the complex machines that perform various steps in making semiconductor chips, such as adding layers of material, shaping them, and testing them. These machines are crucial for producing the advanced chips used in computers, data centers, and new technologies like artificial intelligence.
2. Applied Global Services (AGS): This segment provides ongoing support, spare parts, and software to keep all that sophisticated equipment running smoothly in customer factories worldwide. In fiscal year 2025, AGS generated $6.39 billion in revenue, accounting for approximately 22.51% of their total business. This is a stable source of recurring income, much like a subscription service, ensuring their customers' production lines stay operational and efficient.
3. Corporate and Reconciling Items (including Display): This smaller segment includes equipment for manufacturing advanced displays, like the OLED and LCD screens you see in high-end tablets and automotive displays. For fiscal year 2025, this category, including Display net revenue of $1.06 billion, represented about 4.18% of their total revenue.

Applied Materials' revenue for the full fiscal year 2025 was $28.37 billion. In the first quarter of fiscal year 2026, they reported revenue of $7.01 billion. The company's growth is heavily influenced by the increasing demand for advanced semiconductors, especially those powering AI computing, high-bandwidth memory, and advanced packaging.

The Metrics That Matter Most

For Applied Materials, a company at the heart of semiconductor manufacturing, these 3 to 5 metrics are key to understanding its financial health:

1. Revenue: This is the total amount of money the company brings in from selling its equipment and services. For Applied Materials, watching revenue is like checking the pulse of the entire semiconductor industry. When chipmakers are investing heavily in new factories and upgrading existing ones, AMAT's revenue tends to grow. For fiscal year 2025, Applied Materials reported record annual revenue of $28.37 billion, up 4% year over year. In Q1 fiscal year 2026, revenue was $7.01 billion. Consistent revenue growth indicates strong demand for their essential tools and services.
2. Gross Margin: This metric tells you how much profit Applied Materials makes from its core products and services after subtracting the direct costs of making them. It's expressed as a percentage. For a company selling highly specialized and technologically advanced equipment, a healthy gross margin shows they have pricing power and efficient manufacturing. Applied Materials' gross margin was 48.7% for fiscal year 2025 and 49.0% (GAAP) for Q1 fiscal year 2026. A strong and improving gross margin suggests they are effectively managing their production costs and selling high-value solutions.
3. Operating Cash Flow: This number shows how much cash the company generates from its everyday business operations before accounting for things like investments or debt payments. For Applied Materials, strong operating cash flow is crucial because they need a lot of cash to fund their research and development (R&D) for future technologies and to return money to shareholders. In Q1 fiscal year 2026, Applied Materials generated $1.69 billion in cash from operations. This metric highlights their ability to self-fund growth and maintain financial flexibility.
4. R&D Expenses (Research & Development Expenses): This metric represents the money Applied Materials spends on inventing new technologies and improving existing ones. In the fast-paced semiconductor world, innovation is everything. High and consistent R&D spending is vital for AMAT to stay ahead of the curve and develop the next generation of chip-making equipment. While specific absolute numbers for 2025/2026 were not readily available, R&D expenses have been growing roughly 10% annually as the company invests in new product pipelines and facilities like the EPIC Center. This investment is critical for their long-term competitiveness and ability to capture future market opportunities driven by trends like AI.
5. EPS (Earnings Per Share): This is the company's profit divided by the number of outstanding shares, giving you the profit attributable to each share of stock. It's a straightforward measure of a company's profitability on a per-share basis, which is very important to investors. Applied Materials reported GAAP EPS of $8.66 for fiscal year 2025 and $2.54 for Q1 fiscal year 2026. Growing EPS indicates that the company is becoming more profitable for its shareholders.

How to Value This Company

For Applied Materials, the most relevant valuation metric is the P/E ratio (Price-to-Earnings ratio).

Here's why and how to use it:

The P/E ratio simply compares the company's current stock price to its earnings per share (EPS). It tells you how much investors are willing to pay for each dollar of the company's annual earnings.

Why it's good for Applied Materials: Applied Materials is a well-established, profitable company in a cyclical but growing industry. Its earnings, while subject to industry cycles, are generally consistent and expected to grow, especially with the current demand for AI-related chips. The P/E ratio is a widely understood and effective way to gauge if a company with stable and growing earnings is considered "cheap" or "expensive" by the market.

How to use it: To figure out if Applied Materials' stock is cheap or expensive using the P/E ratio, you'd compare its current P/E ratio to:

• Its own historical P/E ratio: Has the stock traded at a higher or lower P/E in the past? If the current P/E is much higher than its historical average, it might be considered expensive.
• The P/E ratios of its competitors: How does AMAT's P/E stack up against other companies that make semiconductor manufacturing equipment? If AMAT's P/E is significantly higher than similar companies, it might suggest investors have higher growth expectations for AMAT, or it could be overvalued.
• The P/E ratio of the broader market: How does it compare to the average P/E of the stock market (like the S&P 500)?

For example, if Applied Materials has a P/E ratio of 30, it means investors are willing to pay $30 for every $1 of earnings the company generates. If its historical average P/E was 20, then a P/E of 30 might suggest the stock is currently more expensive than usual, perhaps due to high expectations for future growth (like from AI demand). Conversely, if its P/E is lower than its historical average or competitors, it might be seen as a potentially undervalued opportunity.