Applied Materials (NASDAQ:AMAT) keeps adding heavyweight partners. Intel recently agreed to work with the company on next-generation transistors, interconnects, and chip packaging, just days after packaging specialist Besi expanded its own long-running collaboration. Yet the stock has spent recent weeks absorbing a very different message: worry that AI spending can’t climb forever.
The business is easy to describe and hard to copy. Applied sells the machines chipmakers use to deposit, etch, and shape ultra-thin layers of material on silicon wafers. It then earns steady service revenue keeping those tools running. If you’ve used an AI chatbot today, the chips answering you almost certainly passed through Applied’s equipment.
So the real question isn’t whether demand is strong, even as investors look toward the other 10 Best Growth Stocks to Buy Now According to Billionaires for capital allocation ideas. It’s whether investors are paying a fair price for a structural boom, or a peak price for a familiar cycle.
Breadth That Pays
Applied’s edge is reach. Advanced AI chips need many layers of materials engineering, and Applied supplies tools across a wide span of them, from transistor formation to the advanced packaging that stacks chips together. That makes it a default call when a customer adds capacity, a position that rival process-equipment makers chase in narrower slices.
Pricing power shows up in the margins. Fiscal Q3 2026 marked Applied’s 13th consecutive quarter of year-over-year gross margin expansion, with non-GAAP gross margin reaching 50.4%. The services arm, Applied Global Services, lifted revenue to $1,781 million from $1,463 million a year earlier, a recurring stream that cushions the lumpier equipment business.
A Record Quarter, a Bigger Forecast
Fiscal Q3 2026 delivered record revenue of $9.12 billion, up 25% year over year, and record non-GAAP earnings per share of $3.50, up 41%. GAAP EPS came in at $3.17, dragged down partly by swings in the value of Applied’s strategic investments. The mix tells the more interesting story. DRAM, the memory that feeds AI accelerators, rose to 26% of equipment revenue from 22% a year earlier. China’s share of total revenue slipped to 28% from 35%, as sales to the US, Korea, and Europe climbed.
Management guided fiscal Q4 revenue to $10.25 billion, plus or minus $500 million, with non-GAAP EPS of $4.02. CEO Gary Dickerson said improved demand visibility from customers points to another strong growth year in 2027. The company is also building out a $500 million Singapore campus that more than doubles its cleanroom capacity there. Its EPIC Center partnerships, now including Broadcom, Besi, and Intel, put Applied inside customers’ R&D years before tools ship, which places it alongside 11 AI Stocks That Will Go to the Moon.
This is the worry that has actually moved the stock. Last month, the heads of three leading AI labs called for slowing how fast AI models improve, and chip stocks took the hit, according to CNBC. Equipment makers feel that kind of news first, because they sell against factories that don’t exist yet.
That’s a fair concern. Chip equipment has always been cyclical, and orders can vanish long before chip sales slow, a risk that hangs over every supplier to AI hardware. Still, nothing in Applied’s reported results or guidance shows a slowdown so far. Its own forecast calls for a record quarter. The risk is real, but the evidence of it hasn’t arrived.
Priced Like a Grower Now
At a forward P/E of 39.66, as of October 9, investors are paying $39.66 for every $1 of expected earnings. That sits well above the sector’s 23.35 and far above Applied’s own five-year average of 21.85. Growth is the counterweight. Analysts expect EPS to grow 44.50% in 2027, and that expected growth rate runs ahead of the forward multiple. If Applied delivers anything close to it, today’s premium shrinks quickly as earnings catch up. Cash backs that up. Applied generated record operating cash flow of $3.04 billion in fiscal Q3 2026 and returned $860 million to shareholders through buybacks and dividends.
Even so, the multiple leaves little margin for error. A stock priced for growth gets punished harder when growth wobbles, and that 21.85 average shows how far the multiple could fall back. Hedge fund interest dipped slightly, with 137 funds holding the stock in the most recent quarter, down from 138 in the prior one. Short interest sits at 1.78% of the float, a sign of relatively limited bearish positioning.
Growth Has to Show Up
The evidence suggests Applied’s premium is buying real momentum, not just enthusiasm: expanding margins, less reliance on China, and a forecast pointing higher still. At nearly 40 times expected earnings, though, the 2027 growth story has to materialize. The setup suits growth-focused investors comfortable with semiconductor swings and a multi-year horizon. A guidance cut in the fiscal Q4 report, or clear signs that big AI customers are pausing capacity plans, would change the picture fast.
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