Applied Materials, Inc. (NASDAQ:AMAT) has given investors more than an AI growth story by delivering the earnings necessary to support it. The stock generated a one-year total return of 79.4%, compared with 13.72% for the S&P 500. After such a rally, the question for investors is no longer whether Applied Materials is benefiting from semiconductor investment, but how much further its profitability can improve.
Yahoo Finance’s September 17 valuation snapshot puts AMAT at 23.42 times forward earnings, compared with 23.92 in October 2025, and therefore provides a reference for examining whether the growth supporting the stock’s valuation is sustainable.
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Bull Case
Applied’s third-quarter results offer more than encouraging sales figures. Revenue increased 25% year-over-year to a record $9.12 billion, while non-GAAP EPS climbed 41% to a record $3.50. More importantly, non-GAAP operating margin expanded from 30.7% to 34.0%. Earnings grew considerably faster than revenue, demonstrating that higher sales translated into stronger profitability. Read more about what Jim Cramer thinks about AMAT here.
The company’s Semiconductor Systems division further illustrates that improvement. Revenue reached $7.04 billion, while its non-GAAP operating margin increased to 38.0% from 33.2%. This is particularly relevant for valuation because Applied is generating more operating profit from each dollar of segment revenue, rather than depending exclusively on additional equipment sales.
Read more about AMAT’s investment case in our recently published article on ASML vs. Applied Materials: Which AI Chip-Equipment Stock Is the Better Buy?
Anyway, there is another dimension to the growth story for Applied Materials, Inc. (NASDAQ:AMAT). Applied Global Services generated $1.78 billion in quarterly revenue, compared with $1.46 billion a year earlier. Services provide a source of revenue alongside new equipment purchases, although their performance also depends on customer activity.
Management’s latest ambitions extend further, as on October 13, Applied outlined plans to gain more than two percentage points of wafer-fabrication-equipment market share by 2030, while targeting non-GAAP gross and operating margins of approximately 54% and 40%, respectively. These are management targets, not achieved results, but they illustrate the additional profitability the company is pursuing. Which other big name stocks does the financial media favor? Access our complete list here for free.
Bear Case
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The difficulty for investors is determining how much of that future improvement investors are already anticipating. The company reported in its fiscal Q3 2026 results that its latest non-GAAP gross margin was 50.4%, below management’s longer-term 54% target through 2030. Reaching that level requires continued execution, and the current results cannot establish when or whether the target will be achieved.
In addition, the business is exposed to how much its semiconductor customers invest and when they place orders. The company itself identifies customer concentration, shifting capacity requirements, and trade restrictions among the uncertainties affecting future results. Semiconductor Systems still represents about three-quarters of revenue, so a weaker equipment-spending environment would matter even if services keep expanding.
Capacity planning adds another consideration for Applied Materials. Inventories increased to $6.56 billion at July’s quarter-end from $5.92 billion in October 2025. Building inventory supports anticipated demand, but it also increases the importance of accurately forecasting customers’ equipment requirements.
Conclusion
Applied Materials, Inc. (NASDAQ:AMAT) has demonstrated that AI-related demand can produce faster earnings growth and expanding margins, giving its valuation support beyond expectations alone. However, its exceptional share-price performance makes future execution increasingly consequential.
The real test is whether Applied can translate its ambitious market-share and margin targets into sustained earnings growth. Its latest results show significant progress, but investors must distinguish the profitability already achieved from the additional gains management expects to deliver.
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This article is originally published at Insider Monkey.
