Applied Materials Plunges 8% Post Q1 Earnings: How to Play the Stock?

Applied Materials, Inc. AMAT has declined 8.2% since reporting its first-quarter fiscal 2025 earnings despite delivering a solid quarter. With the recent sell-off, AMAT has been down 15.2% over the past year, underperforming the Zacks Electronics- Semiconductors industry’s gain of 45.3%.One-Year Price Return PerformanceImage Source: Zacks Investment ResearchThe stock's post-earnings drop has raised concerns among investors about whether this is a buying opportunity or a warning sign. However, while short-term headwinds have caused volatility, Applied Materials’ long-term positioning remains strong. Given its technological leadership, financial resilience and AI-driven growth opportunities, holding the stock remains the best strategy.Why AMAT Shares Fell After Earnings ResultsThe decline is primarily due to softer-than-expected second-quarter guidance, geopolitical risks tied to U.S.-China trade restrictions and concerns over slowing investment in key markets. Applied Materials projected second-quarter revenues of $7.1 billion (+/- $400 million), slightly below the Zacks Consensus Estimate of $7.13 billion. Its non-GAAP EPS guidance of $2.30 (+/- 18 cents) also fell short of expectations. Investors reacted negatively, interpreting this as a sign of slowing near-term growth.The impact of U.S. export controls on semiconductor equipment sales to China has further pressured Applied Materials shares. Management expects these restrictions to reduce fiscal 2025 revenues by $400 million, with half of this decline hitting in the second quarter. China has historically been AMAT’s largest single market, contributing up to 30% of total revenues. With tighter regulations limiting Applied Materials’ ability to service certain customers, particularly in its Applied Global Services (“AGS”) segment, investor sentiment has weakened.Adding to concerns, Applied Materials acknowledged that investment in the IoT, Communications, Automotive, Power, and Sensors (“ICAPS”) segment is slowing after a strong 2023 and 2024. ICAPS has been a significant growth driver, and any sustained slowdown could pressure revenues and margins as the industry normalizes from a high-demand period.However, these headwinds are short-term and do not alter Applied Materials’ long-term trajectory. The company is actively expanding its presence in non-China markets while strengthening its leadership in advanced semiconductor technologies.AMAT’s Technological Leadership Remains a Major AdvantageAI-driven semiconductor demand is at the heart of the industry’s next growth cycle, and Applied Materials is well-positioned to capitalize on this transformation. The company has made significant strides in cutting-edge chip manufacturing, particularly in gate-all-around (GAA) transistors, high-bandwidth memory (HBM) and advanced packaging. These innovations are critical to enabling faster, more energy-efficient AI processing.Applied Materials’ revenues from advanced semiconductor nodes surpassed $2.5 billion in fiscal 2024, and management expects this figure to double in fiscal 2025. The transition from FinFET to GAA transistors is expanding AMAT’s total addressable market by 15%, while Applied Materials’ revenues in this segment are projected to grow 30% per wafer fab capacity expansion. The company is also on track to secure more than 50% of the market share in GAA and backside power delivery, solidifying its leadership in the AI computing era.The advanced packaging segment has become an increasingly critical part of Applied Materials’ business, with revenues tripling over the past four years to $1.7 billion in fiscal 2024. AMAT has secured volume orders from leading-edge customers for its Integrated Hybrid Bonding technology, strengthening its position in next-generation chip manufacturing. The upcoming EPIC Center in Silicon Valley, expected to go live in 2026, will further drive innovation in semiconductor packaging and process technology.AMAT’s Financial Resilience Supports Long-Term GrowthDespite ongoing industry headwinds, Applied Materials continues to demonstrate strong financial performance. In the first quarter of 2025, revenues rose 7% year over year to $7.17 billion, surpassing expectations. Non-GAAP earnings per share (EPS) increased 12% to $2.38, highlighting the company’s ability to maintain profitability even in a volatile market.Find the latest EPS estimates and surprises on Zacks Earnings Calendar.Applied Materials’ gross margin reached 48.9%, its highest level since 2000, due to a favorable product mix, value-based pricing and cost discipline. The company also returned $1.64 billion to shareholders in the first quarter, including $1.32 billion in stock buybacks and $326 million in dividends. With a strong cash position and continued investments in research & development, AMAT remains well-prepared to navigate short-term pressures while ensuring long-term growth.With the Zacks Consensus Estimate projecting revenue growth of 7% in fiscal 2025 and 6.9% in fiscal 2026, alongside EPS growth of 8.6% and 7% in respective fiscals, Applied Materials is on track to sustain its momentum. Additionally, the company has consistently outperformed earnings expectations, delivering an average surprise of 5.6% over the last four quarters, reflecting its strong execution capabilities.Applied Materials, Inc. Price, Consensus and EPS Surprise Applied Materials, Inc. price-consensus-eps-surprise-chart | Applied Materials, Inc. QuoteAMAT Valuation Still Offers Upside PotentialApplied Materials is trading at a 12-month forward P/E ratio of 17.64, significantly below the industry average of 32.96. Compared to industry peers such as Broadcom AVGO at 32.05X, Marvell Technology MRVL at 38.79X and FormFactor FORM at 27.86X, AMAT appears undervalued. Given its dominance in semiconductor equipment and AI-driven chip manufacturing, this valuation discount suggests strong upside potential over the long term.Forward 12-Month P/E RatioImage Source: Zacks Investment ResearchConclusion: Hold AMAT Stock for NowThe 8.2% post-earnings dip reflects short-term concerns rather than any fundamental weakness in Applied Materials’ business. The company remains a key player in semiconductor manufacturing, with a dominant position in AI-driven chip production, advanced packaging and next-generation process technology. While geopolitical risks and ICAPS investment slowdown are legitimate concerns, AMAT’s financial strength, market share gains and technological leadership make it a strong long-term investment.For investors, holding AMAT is the best approach. Once industry conditions stabilize and AI-driven semiconductor demand accelerates, the stock is well-positioned for a strong rebound. Currently, Applied Materials carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.Just Released: Zacks Top 10 Stocks for 2025Hurry – you can still get in early on our 10 top tickers for 2025. Handpicked by Zacks Director of Research Sheraz Mian, this portfolio has been stunningly and consistently successful. From inception in 2012 through November, 2024, the Zacks Top 10 Stocks gained +2,112.6%, more than QUADRUPLING the S&P 500’s +475.6%. 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