Is Applied Materials Stock a Buy as AI Chip Manufacturing Surges?

Over the past few years, the explosive growth of artificial intelligence (AI) has generated strong tailwinds for AI-focused chipmakers like Nvidia. Therefore, the most straightforward way to profit from that trend might be to simply invest in those top chipmakers.

Yet semiconductor equipment makers like Applied Materials (NASDAQ: AMAT) are also benefiting from the AI boom. It isn't a hypergrowth play like Nvidia, but Applied Materials' stock has risen nearly 270% over the past five years as the S&P 500 has nearly doubled. Let's see why it outperformed the market -- and if it's still worth buying.

Image source: Getty Images.

What does Applied Materials do?

Applied Materials is one of the world's top suppliers of semiconductor manufacturing equipment. In fiscal 2024 (which ended last October), it generated 73% of its revenue from its semiconductor systems business, which produces a wide range of equipment for the foundry, logic, and memory chipmaking markets.

Another 23% came from its related services, while the remaining 4% came from its display and adjacent markets. Here's how its core businesses fared over the past five years.

Data source: Applied Materials. YOY = year over year.

In fiscal 2022 and fiscal 2023, growth decelerated as the semiconductor market lapped its pandemic-driven boom in 2020 and 2021. Many chipmakers expanded their capacity during the crisis to meet the soaring demand for new PCs and servers. But as that temporary growth spurt ended, rising chip inventories drove many producers to reduce their capital expenditures and purchase less equipment.

A supply glut in the memory chip market, tighter export curbs on chip sales to China, and supply chain bottlenecks exacerbated that pressure. To make matters worse, inflation drove up its operating costs while rising interest rates drove many chipmakers to rein in their expansion plans.

But in fiscal 2024 and fiscal 2025, Applied Materials' top- and bottom-line growth accelerated again, driven by four main catalysts: the growth of the AI market, the memory market's recovery, the stabilization of its supply chain, and lower interest rates.

Will Applied Materials keep outperforming the market?

The expansion of the semiconductor market helped Applied Materials outperform the S&P 500 over the past five years. Today, it hovers near its 52-week high because investors are likely impressed by its near-term tailwinds -- especially its exposure to the booming AI market.

During the company's latest conference call, CEO Gary Dickerson said its long-term thesis "remains unchanged as companies and countries compete to win the race for AI leadership" -- and that the business is "best positioned at the major device inflections that enable the AI road map."

However, it doesn't disclose exactly how much revenue it generates from AI-focused chipmakers. It's also growing much slower than its industry peer ASML, which dominates the high-growth niche of lithography systems.

For fiscal 2025, analysts expect Applied Materials' revenue and adjusted earnings per share (EPS) to grow 4% and 8%, respectively. For fiscal 2026, they expect revenue and adjusted EPS to rise 3% and 1%, respectively. Those rates are stable, but they're not that impressive for a stock that trades at 23 times forward earnings. Its paltry forward dividend yield of 0.8% also won't attract any serious income investors.

So while Applied Materials can be strong long-term play on the semiconductor market, I wouldn't call it an AI stock yet. It would benefit from the expansion of the AI market, but it's also exposed to plenty of other markets. Tighter curbs against exports to China, which accounted for 30% of its revenue in the first nine months of fiscal 2025, could generate even more unpredictable headwinds.

Therefore, Applied Materials' stock might still be worth buying (especially at a slightly lower valuation), but there are plenty of better ways to invest in the AI chipmaking boom. I personally think ASML -- which has monopolized the market for high-end lithography systems -- is a better play on that secular trend.

Leo Sun has positions in ASML. The Motley Fool has positions in and recommends ASML, Applied Materials, and Nvidia. The Motley Fool has a disclosure policy.