Applied Materials: From AI Chips to HBM, Why Does It Benefit From Both?

AI chips and HBM may appear to be two different types of products, but they share one underlying trend: both are becoming increasingly difficult to manufacture. The more complex the chip structure, the more new materials and process steps are required, increasing demand for deposition, etch, polishing, inspection, and packaging equipment.

Applied Materials (AMAT) is one of the equipment companies with the broadest exposure to these processes. AMAT participates in deposition, etch, ion implantation, thermal processing, chemical mechanical planarization, e-beam inspection, and advanced packaging. Whether customers are investing in advanced logic, DRAM, or HBM, the company has opportunities to win orders across multiple process steps. This also means AMAT’s growth does not depend solely on how much new capacity wafer fabs build. Even if wafer output does not increase at the same rate, the equipment value per wafer can continue to rise as chip manufacturing requires more process steps. Compared with relying purely on capital expenditure expansion, this represents a more durable growth driver.

Source: TradingKey

By the third quarter of fiscal 2026, these benefits had already begun to show up in AMAT’s results. Quarterly revenue reached a record $9.115 billion, up 25% year over year. Non-GAAP gross margin increased to 50.4%, while earnings per share rose 41% year over year to $3.50. The midpoint of fourth-quarter revenue guidance increased further to $10.25 billion, indicating that growth is still accelerating.

Beyond Capital Spending, AMAT Has Another Long-Term Growth Driver

In the past, the most important variable when analyzing semiconductor equipment companies was usually global wafer-fab capital expenditure. When customers built more production lines, equipment companies’ revenue increased. When memory prices declined and wafer fabs reduced investment, equipment orders fell accordingly. This framework remains valid today, but it is no longer complete. An equipment company’s revenue can broadly be broken down into four components: how much capacity customers build, how much equipment is required for each unit of capacity, how much market share the company holds in the relevant equipment categories, and how much service revenue its installed base can generate.

Historically, industry growth depended more heavily on rising wafer starts and continued process-node scaling. Today, the constraints facing advanced chips have expanded beyond whether transistors can keep shrinking to include power consumption, material interfaces, interconnect efficiency, and how chips are connected to one another. Solving these problems requires more new materials, three-dimensional structures, and process steps. Even if the number of wafers ultimately produced by fabs does not increase at the same pace, each wafer may still require more deposition, etch, materials modification, polishing, and inspection steps. These are precisely the areas in which AMAT participates.

This is why AMAT should not be viewed solely as a cyclical capital expenditure stock. Industry capital spending determines when customers purchase equipment, while manufacturing complexity determines how much equipment is needed for each unit of new capacity. The former remains cyclical, while the latter is rising over the long term. This does not mean AMAT has escaped the cycle. When customers reduce capital spending, technology roadmaps do not reverse, but equipment purchases can still be delayed. More precisely, AMAT remains a cyclical equipment company, but greater technological complexity is raising its long-term growth baseline, while its service business is reducing downside volatility to some extent.

The Real Moat: Turning Product Breadth Into Process Integration

AMAT’s defining feature is the breadth of its product portfolio. Investment cycles in logic, DRAM, NAND, and advanced packaging do not move in perfect sync, so a diversified product portfolio can reduce the company’s dependence on any single market. When NAND investment is weak, advanced logic or DRAM may take over as a growth driver. When orders for new wafer-fab equipment slow, service revenue can provide some support. But if AMAT merely houses many equipment categories under one company, that breadth can do little more than smooth the cycle and is unlikely to become a genuine competitive barrier.

What matters more is whether AMAT can integrate multiple adjacent processes. Advanced manufacturing is highly sensitive to material interfaces. Moving wafers between different pieces of equipment can lead to oxidation, contamination, and changes in material properties. If deposition, treatment, and selective material removal can be completed sequentially on the same vacuum platform, customers gain more than procurement convenience: they can achieve more stable yields, faster high-volume manufacturing ramps, and lower total manufacturing costs. AMAT is trying to move from supplying individual tools to solving a broader set of materials-engineering problems. That is where the value of its platform lies.

The other side of product breadth is that AMAT faces strong competitors in many of its markets. In atomic layer deposition for gate-all-around (GAA) transistors, it competes with ASM International. In critical etch applications, it faces Lam Research and Tokyo Electron. In inspection and metrology, it must challenge KLA. AMAT may rank near the top in many markets, but unlike ASML, it does not control a single equipment category that customers can barely work around.

Therefore, the success of AMAT’s platform strategy should not be judged by how many new products it launches, but by three outcomes: whether new device architectures increase AMAT’s equipment value per wafer, whether the company can sustain revenue growth above the global wafer-fab equipment market, and whether market-share gains translate into gross-margin expansion.

The EPIC research and development center that AMAT is building is also part of this strategy. The company aims to bring chip designers, wafer fabs, and equipment and materials suppliers together earlier in the development of next-generation processes. If AMAT can participate in materials and equipment selection before customers finalize their device architectures, it can enter the high-volume manufacturing process earlier, while raising customers’ future switching costs. By the third quarter of fiscal 2026, the company had disclosed 11 EPIC partnerships. At this stage, however, these partnerships primarily indicate that AMAT has secured opportunities to participate earlier. Whether they ultimately translate into high-volume manufacturing qualifications, market share, and revenue still requires further validation.

Three Growth Drivers: Advanced Logic, Memory Upgrades, and Advanced Packaging

AMAT’s most important growth opportunities can currently be grouped into three areas.

The first is advanced logic.

As transistors transition from FinFETs to gate-all-around architectures, fin-shaped structures are replaced by multiple stacked nanosheets, creating more demanding requirements for epitaxial growth, selective material removal, gate deposition, and interface control. Backside power delivery moves the power distribution network to the back of the wafer, adding further wafer-thinning, bonding, and materials-processing steps. All these changes increase the materials-engineering value required per wafer. Because AMAT can provide epitaxy, deposition, materials modification, polishing, and e-beam inspection equipment, it is theoretically one of the most broadly exposed beneficiaries of this transition. Advanced logic is also one of the most competitive markets among global equipment leaders. Wafer-fab expansion can drive growth for all relevant equipment suppliers, but AMAT’s long-term value will ultimately depend on how many exclusive or preferred positions it secures in the newly added process steps.

The second is memory architecture upgrades.

Unlike previous memory cycles driven by broad capacity expansion across conventional DRAM and NAND, incremental capital spending in the current cycle is more concentrated in advanced DRAM, HBM, and the capacity needed to support them. In the third quarter of fiscal 2026, DRAM accounted for 26% of AMAT’s Semiconductor Systems revenue, up from 22% a year earlier, while DRAM-related revenue increased 52% year over year. DRAM itself requires increasingly complex capacitor, transistor, and interconnect structures, while HBM adds through-silicon vias, wafer thinning, copper interconnects, and multilayer stacking. AMAT participates in both front-end wafer fabrication and parts of the packaging process, so the equipment value created by HBM is not confined to a single product category.

In the short term, DRAM and HBM are among AMAT’s clearest growth drivers. Over the medium term, the key questions are whether incremental demand can continue absorbing capacity after major memory manufacturers complete their current expansion plans, and whether conventional DRAM capital spending can take over as the next driver. Greater technological intensity can increase equipment value per unit of capacity, but it cannot eliminate the cycle created by supply-demand mismatches in the memory industry.

The third is advanced packaging.

As advanced chips become increasingly dependent on HBM and chiplet interconnects, packaging is adopting more technologies traditionally associated with front-end wafer fabrication, including finer copper interconnects, tighter wafer-planarity control, thinner dies, and more precise defect inspection. AMAT can extend its capabilities in electroplating, chemical mechanical planarization, deposition, and e-beam inspection into these applications. The company expects advanced-packaging revenue to grow by more than 70% in calendar 2026, indicating that this growth opportunity is already beginning to materialize.

The Next Wave of Capital Spending Is Moving Toward AMAT’s Strengths

For AMAT, how much global capital expenditure grows is certainly important, but where that spending goes matters even more. The same amount of equipment spending can have very different implications for different equipment companies depending on which manufacturing processes receive the investment. Large-scale NAND expansion benefits high-aspect-ratio etch suppliers more directly. An increase in the number of extreme ultraviolet lithography layers primarily benefits ASML. Greater inspection intensity is more directly positive for KLA.

The most favorable combination for AMAT is simultaneous growth in advanced logic, DRAM and HBM, and advanced packaging. All these areas require more materials-engineering steps and are therefore particularly well suited to AMAT’s broad product portfolio. Management expects advanced foundry and logic, DRAM, and advanced packaging to account for approximately 80% of global wafer-fab equipment market growth in 2026 and 2027. In the third quarter of fiscal 2026, AMAT’s Semiconductor Systems revenue reached $7.04 billion, with foundry, logic, and other accounting for 67%, DRAM for 26%, and NAND for only 7%. The current areas of incremental industry spending are therefore closely aligned with AMAT’s areas of exposure. This is an important reason why the company is confident it can outperform the overall equipment market in calendar 2026. But it also means the market is pricing in the continuation of several favorable trends at the same time. If advanced-logic projects are delayed, HBM supply gradually loosens, or advanced packaging moves from rapid expansion into a digestion phase, AMAT’s broad product portfolio may cushion the impact but cannot fully offset a slowdown in industry growth.

The company plans to double quarterly systems output capacity from current levels by 2028. On the one hand, this indicates that customers are providing much greater order visibility. On the other hand, it also means that the company is increasing manufacturing capacity, inventory, and fixed investment at a time when orders are strongest. If customers’ long-term demand forecasts prove too optimistic, these investments could amplify the next downturn. The risk in the equipment industry is usually not a lack of orders during prosperous periods, but that strong orders encourage both customers and equipment suppliers to expand future capacity at the same time.

China Remains AMAT’s Largest Market—and Its Most Important Risk Variable

China is not only an important source of AMAT’s revenue, but also the company’s largest single market. In the third quarter of fiscal 2026, AMAT generated $2.506 billion of revenue from China, representing 28% of total revenue, ahead of Taiwan at 22%, Korea at 17%, and the United States at 15%. Although China’s revenue contribution declined from 35% a year earlier, the absolute amount decreased only slightly, indicating that investment by local wafer fabs continues to provide support. Management expects revenue from China to continue growing in calendar 2026, mainly driven by 28-nanometer foundry and logic capacity expansion.

However, the significance of the Chinese market for AMAT is no longer simply a question of how long capital spending can continue to grow. It is simultaneously affected by export controls, compliance risks, and the substitution of foreign equipment with domestically produced tools.

The first issue is which equipment AMAT is still permitted to sell and service. In February 2026, AMAT and its Korean subsidiary agreed to pay approximately $252 million to the U.S. Department of Commerce’s Bureau of Industry and Security to settle violations involving previous exports of ion implantation equipment to China. The relevant transactions took place in 2021 and 2022 and involved equipment valued at approximately $126 million. The penalty was twice the value of the transactions and was the second-largest penalty ever imposed by the Bureau of Industry and Security. In addition to the fine, AMAT is required to conduct multiple audits of its export compliance program and submit annual certifications. Although the case does not mean that AMAT committed another illegal sale in 2026, it shows that the company’s China business faces more than tighter restrictions on the range of products it can export. Determining whether a tool can be sold, where it can be assembled, and how the final customer and end use are classified can all create additional compliance costs. If the United States further expands the range of controlled equipment, customers, or services, the impact could extend beyond new equipment sales to spare parts, upgrades, and ongoing maintenance.

The second issue is whether investment by Chinese wafer fabs can be sustained. Over the past several years, concentrated expansion in China’s mature-node capacity helped AMAT maintain revenue during a period of weak global memory investment. But equipment procurement is inherently front-loaded: wafer fabs place concentrated orders during construction, and purchases naturally decline after production lines begin operating. Therefore, even if near-term revenue continues growing, investors must determine whether it reflects sustainable demand from new projects or simply the fulfillment of orders associated with an earlier wave of intensive fab construction.

The third issue—and the one with the longest-lasting impact—is the localization of semiconductor equipment in China. Media reports indicate that Chinese wafer fabs seeking approval for new or expanded capacity have been instructed to direct at least 50% of their equipment spending toward domestic suppliers. However, this threshold has not appeared in a publicly issued formal regulation and is better understood as a policy direction implemented through project approvals and procurement processes. It may also be applied flexibly to advanced equipment for which no domestic substitute is available. Chinese suppliers have made faster progress in cleaning, etch, and certain thermal-processing tools, and are continuing to expand into thin-film deposition and chemical mechanical planarization. These areas overlap significantly with AMAT’s product portfolio. Even where AMAT is not restricted by export controls, its available market share in China could still decline if wafer fabs allocate more mature-node equipment orders to domestic suppliers such as Naura Technology, AMEC, and Piotech in order to satisfy localization requirements.

Overall, China may continue contributing to AMAT’s revenue growth in the near term, but it can no longer be treated as an unconditional source of growth. Assessing this business will require more than tracking whether China’s revenue contribution declines. Investors must also monitor the absolute level of China revenue, AMAT’s share of mature-node equipment spending, whether export controls expand to services and spare parts, and whether advanced-node investment in Taiwan, Korea, and the United States can gradually reduce the company’s dependence on the Chinese market.

The Service Business Is Improving Revenue Stability

If China revenue reflects AMAT’s geographic mix, Applied Global Services reflects its business mix. It measures the service, spare-parts, and equipment-upgrade revenue AMAT generates from customers worldwide. In the third quarter of fiscal 2026, Applied Global Services revenue reached $1.781 billion, up 22% year over year and representing approximately 20% of total company revenue. Its operating margin reached 30.1%.

More than 37,000 process chambers are currently connected to AMAT’s AIx software platform for equipment monitoring, fault diagnosis, and predictive maintenance. As the installed base expands and equipment becomes more complex, customers’ demand for maintenance and production optimization should also increase. The company expects its service business to grow by more than 20% in calendar 2026 and to sustain a long-term annual growth rate of approximately 15%. The value of the service business lies in reducing AMAT’s dependence on new equipment orders. Wafer fabs may postpone the construction of new production lines, but they still need to maintain equipment already in operation, making service revenue generally more stable than new-equipment sales.

Of course, the service business is not completely immune to the cycle. When wafer-fab utilization declines, spare-parts consumption and demand for transactional services may also slow. But as the installed base expands and long-term service agreements account for a larger share of revenue, this business could provide more stable cash flow when equipment orders decline and reduce the volatility of AMAT’s overall earnings.

Rising Margins and R&D Investment Are Opening Up Long-Term Growth Opportunities

The most encouraging aspect of AMAT’s recent performance is not simply that revenue has reached a record high, but that margins have improved at the same time. In the first nine months of fiscal 2026, the company generated $24.037 billion in revenue, up 11% year over year. In the third quarter, Semiconductor Systems gross margin reached 55.3%, up 1.9 percentage points from a year earlier, while operating margin increased from 33.0% to 37.7%. The company has now delivered 13 consecutive quarters of year-over-year gross-margin expansion. Management attributes this improvement to value-based pricing, new-product mix, and cost improvements. The results indicate that recent profit growth has not been driven solely by operating leverage from higher revenue. AMAT is also converting the yield and efficiency improvements it delivers to customers into higher pricing.

R&D investment is the necessary cost of this growth strategy. In the first nine months of the fiscal year, research, development, and engineering expenses reached $3.055 billion, up approximately 15% year over year and equivalent to 12.7% of revenue. R&D is growing faster than revenue, which may limit operating leverage in the short term, but it also determines whether AMAT can secure early process positions in GAA, backside power delivery, and advanced packaging. AMAT’s R&D should therefore not be evaluated solely by the amount spent. Investors must also assess whether new-product revenue, customer qualifications for high-volume manufacturing, and market share improve alongside that investment. If R&D spending continues rising without corresponding market-share gains, the company’s supposed platform advantage would need to be reassessed.

Cash-flow performance should be viewed over two different time horizons. In the third quarter, operating cash flow reached $3.037 billion. After deducting $707 million in capital expenditures, free cash flow was approximately $2.33 billion, equivalent to 92% of quarterly net income—a strong result. But operating cash flow for the first nine months of the fiscal year was only $5.568 billion, well below net income of $7.370 billion, mainly because of working-capital requirements involving accounts receivable and inventory. The company is building inventory to support higher shipment volumes, which does not necessarily indicate weakening demand. However, if inventory and accounts receivable continue growing faster than revenue, the quality of reported earnings would deteriorate.

Shareholder returns remain clearly defined. In the third quarter, the company returned $860 million through share repurchases and dividends and stated that it intends to return 80% to 100% of free cash flow to shareholders over the long term. At the end of the quarter, AMAT still had $12.8 billion remaining under its share-repurchase authorization. However, when valuation has already risen substantially, the same amount of repurchases retires fewer shares and contributes less to earnings-per-share growth. Capital returns should therefore be evaluated not only by the percentage of cash returned, but also by the valuation at which the company repurchases its shares.

From a Cyclical Recovery to Long-Term Growth, AMAT Is Being Revalued

AMAT’s valuation foundation is expanding from a pure equipment-cycle story toward a longer-term structural-growth story. Compared with conventional cyclical equipment companies, AMAT has broader product coverage, a larger installed base, and a growing service business. This allows it to participate in more technology transitions while diversifying fluctuations across different end-market investment cycles. The market therefore has reason to assign AMAT a higher valuation than a traditional cyclical equipment supplier. A comparison with ASML, Lam Research, and KLA shows how the market weighs differences in product breadth, technological barriers, and earnings stability.

Note: Gross margins are based on the latest quarterly GAAP figures reported by each company for periods ending between June and July 2026. P/E ratios are based on trailing twelve-month figures around September 10, 2026.

Compared with Lam Research, AMAT is less dependent on a single memory cycle, but its competitive advantage in critical etch applications is less concentrated. Compared with KLA, AMAT can participate in a broader range of markets but lacks the higher-margin and more deeply embedded characteristics of process-control equipment. Compared with ASML, AMAT can participate in more technology transitions but does not possess a market position as close to irreplaceable as that of extreme ultraviolet lithography.

As of September 2026, AMAT’s trailing twelve-month P/E ratio of approximately 40.5x—well above the company’s five-year average. Yet compared with the P/E ratios of Lam Research and KLA over the same period, AMAT still traded at a relative discount. This discount should not automatically be interpreted as undervaluation. It partly reflects AMAT’s more diversified business structure, relatively high China exposure, and lack of a single absolute monopoly position. Conversely, AMAT’s current valuation premium to its own historical average indicates that the market no longer views it merely as a beneficiary of an ordinary equipment cycle. Investors are beginning to price in more durable structural growth.

To justify this valuation, the company must prove at least three things: that growth in advanced logic, DRAM, and packaging includes sustained market-share gains; that value-based pricing and product mix can support continued gross-margin expansion; and that the service business can maintain double-digit growth when the equipment cycle eventually slows. If future revenue growth is driven mainly by concentrated customer expansion, the valuation could still contract rapidly once capital spending peaks. Only if equipment value per wafer, market share, and service revenue grow together will AMAT have a basis for moving beyond the traditional valuation ceiling applied to diversified equipment companies.

AMAT’s Next Phase: Growing Into Its Valuation Through Earnings

Overall, AMAT remains a company worth watching closely in the current semiconductor equipment upcycle. Its opportunity comes not only from customers increasing capital spending, but also from GAA, advanced DRAM, HBM, and advanced packaging jointly increasing equipment value per wafer. At the same time, the service business is expanding and margins are improving, giving AMAT an opportunity to evolve from a broadly diversified cyclical equipment supplier into a platform company that can benefit over the long term from rising semiconductor manufacturing complexity.

The current valuation is indeed no longer low, but that does not mean the investment opportunity has disappeared. AMAT continues to trade at a valuation discount to KLA, Lam Research, and ASML, while earnings expectations for 2026 and 2027 may still have room to rise. If demand for advanced logic, DRAM, and advanced packaging remains strong and market share and margins improve together, the main driver of future share-price performance will no longer be simple multiple expansion, but profit growth and a reassessment of the company’s long-term growth baseline.

Therefore, the key question for AMAT today is not whether it is still as cheap as it was in the past, but whether earnings can grow faster than the expectations embedded in its current valuation. As long as the company continues to outperform the equipment market, Semiconductor Systems gross margin remains around 55%, and service revenue sustains double-digit growth, earnings growth may still allow AMAT to grow into its current valuation. If these indicators begin to weaken, however, investors will need to watch for valuation pressure as the capital expenditure cycle approaches its peak.

Disclaimer: This article is based on publicly available information and is intended solely for general research, educational, and informational purposes. It does not take into account any individual’s investment objectives, financial circumstances, or risk tolerance, and does not constitute an offer, solicitation, or personalized investment advice regarding any security. The views expressed represent the author’s judgment as of the publication date. Readers should independently verify the relevant information and assume full responsibility for their own investment decisions.