Applied Materials Q2 FY2025: Record earnings fueled by AI, stock slides on outlook concerns

Why Did Applied Materials Stock Fall After Strong Q2 Results?

Applied Materials, Inc. (NASDAQ: AMAT) posted its second-quarter fiscal 2025 earnings on May 15, reporting record-breaking revenue and earnings per share, yet the stock closed down 5.25% at $165.57 on May 16 and declined further in after-hours trading. This post-earnings pullback, despite strong financial results, reflects broader market unease around forward guidance, global trade exposure, and potential margin headwinds as the semiconductor capital cycle enters a new phase of geopolitical complexity and pricing normalization. While the company delivered operationally, investor sentiment suggests increasing scrutiny over future performance rather than a celebration of past milestones.

What Were the Key Financial Highlights in Q2 FY2025?

In the second quarter, Applied Materials reported net revenue of $7.10 billion, marking a 7 percent increase from the $6.65 billion recorded in the same quarter last year. Gross margin on a GAAP basis reached 49.1 percent, while operating margin expanded to 30.5 percent. On a non-GAAP basis, gross margin improved to 49.2 percent and operating margin rose to 30.7 percent, with both metrics improving by 170 basis points year-over-year. The company also reported a record GAAP diluted earnings per share of $2.63, a 28 percent increase from the prior year, and a non-GAAP EPS of $2.39, up 14 percent.

Net income under GAAP rose to $2.14 billion from $1.72 billion in the year-ago period. Non-GAAP net income was $1.94 billion, up from $1.74 billion. Operating cash flow was robust at $1.57 billion, which supported a return of $2.00 billion to shareholders through $1.67 billion in share repurchases and $325 million in dividends. This combination of strong earnings, wide margins, and efficient capital allocation underscored the firm’s financial strength, even as investors raised concerns about its near-term revenue trajectory.

How Did Each Segment Contribute to Growth?

The Semiconductor Systems segment continued to be the company’s engine of growth, delivering $5.26 billion in revenue during the quarter, up from $4.90 billion in Q2 FY2024. Operating margin within this segment rose to 36.2 percent on a GAAP basis and to 36.4 percent on a non-GAAP basis. This performance was driven primarily by consistent demand from foundry and logic customers, who made up 65 percent of the segment’s revenue. DRAM contributed 27 percent, while flash memory accounted for 8 percent. The resilience in logic and foundry orders is closely tied to ongoing AI infrastructure investment, which continues to demand advanced node process tools.

Applied Global Services, the company’s services and upgrade business, reported $1.57 billion in revenue, largely flat compared to $1.53 billion a year earlier. This business continues to benefit from the growing installed base of Applied’s equipment worldwide. Operating margin remained stable at 28.5 percent, highlighting the recurring revenue profile and high customer retention within this division. The Display segment stood out this quarter with a 45 percent year-on-year jump in revenue, reaching $259 million from $179 million. Its operating margin expanded significantly from 2.8 percent to 26.3 percent, reflecting a pickup in demand for OLED and advanced display equipment from Asian panel manufacturers.

Which Regions Drove Revenue, and Where Did Weakness Emerge?

Taiwan and South Korea were the top-performing geographic markets for Applied Materials during the quarter. Taiwan revenue almost doubled year-over-year to $1.99 billion, while revenue from South Korea increased to $1.56 billion from $988 million. Combined, these two markets contributed nearly 50 percent of total revenue. This surge aligns with the intensifying investments by Taiwanese and Korean foundries into sub-5nm process nodes and advanced packaging facilities designed for AI and high-performance computing workloads.

In contrast, revenue from China declined sharply to $1.77 billion from $2.83 billion in the same quarter last year. China’s share of total revenue dropped from 43 percent to 25 percent, a significant contraction that reflects the impact of U.S. export restrictions and licensing challenges related to advanced semiconductor manufacturing equipment. While Applied’s management did not specify customer-level details, it is clear that limitations on tool shipments to leading-edge Chinese fabs are reshaping the company’s geographic revenue mix.

Revenue from the United States dipped slightly to $808 million, while Europe contributed $252 million and Southeast Asia brought in $135 million, both showing marginal declines. Japan, however, recorded an increase to $572 million, suggesting a modest recovery in local semiconductor capex activity, possibly driven by incentives from the Japanese government’s semiconductor revitalization programs.

What Does the Q3 FY2025 Guidance Suggest?

Applied Materials provided relatively cautious guidance for the third quarter of fiscal 2025. The company expects revenue of approximately $7.2 billion, with a margin of plus or minus $500 million, and projected non-GAAP earnings per share of $2.35, with a potential range of ±$0.20. The gross margin is expected to decline slightly to 48.3 percent from the current 49.2 percent level, which may reflect a less favorable product mix, pricing adjustments, or shifts in regional revenue contributions.

The forecast includes a $0.04 per share tax benefit from intra-entity intangible asset transfers, but excludes known acquisition-related charges and any other unquantifiable items. The flat topline guidance and slightly lower margin outlook weighed on investor sentiment, particularly given heightened expectations following the strong Q2 results. Market participants appear to be factoring in the possibility that the company’s recent performance may mark a near-term peak rather than a stepping stone toward accelerated future growth.

How Are Analysts and Investors Reacting?

Analyst sentiment remains constructive but more measured in tone. Equity research desks continue to emphasize Applied’s dominant share across key deposition and etch categories and its leadership in enabling next-generation chip architectures. The company’s critical role in supplying tools for 3nm and upcoming 2nm nodes ensures its relevance in the AI-driven capital investment cycle. That said, some analysts have flagged the China revenue decline and margin headwinds as potential catalysts for short-term volatility.

Investor sentiment appears split. Foreign institutional investors, especially those exposed to emerging markets or high-China beta, are reportedly trimming exposure to Applied due to escalating U.S.–China technology tensions. Conversely, domestic mutual funds and long-term AI infrastructure ETFs have begun accumulating AMAT shares on the dip, viewing the stock as undervalued given its forward earnings potential and consistent shareholder returns. Buy-side targets remain in the range of $180 to $210, but traders anticipate a period of consolidation near the $160–$165 levels unless macro visibility improves.

How Does AMAT Fit Into the AI and Semiconductor Capital Cycle?

Applied Materials sits at the intersection of two converging megatrends: the AI compute boom and the global push toward semiconductor self-sufficiency. As chipmakers invest billions into building out capacity for AI accelerators and advanced packaging, Applied’s broad equipment portfolio positions it as an essential partner. The company’s tools are embedded across multiple stages of wafer fabrication and backend assembly, making it a key enabler of high-performance and energy-efficient semiconductors.

In particular, the transition toward gate-all-around transistors, 3D NAND scaling, and heterogeneously integrated systems plays to Applied’s strengths in atomic-level material engineering. The company is also investing heavily in extending its process control and AI-enhanced inspection solutions to help customers maintain yield at tighter geometries. This end-to-end positioning across both front-end and back-end manufacturing steps offers resilience, even as specific segments of the chip market fluctuate cyclically.

What Risks Should Investors Be Watching?

Despite its strong operational performance, Applied Materials remains exposed to several external risks. Geopolitical tension between the U.S. and China continues to cloud the outlook, with potential for further export restrictions or retaliatory action that could affect revenue visibility. Additionally, while AI infrastructure investment remains strong, softness in broader electronics demand—such as smartphones, PCs, and consumer IoT—could eventually slow wafer starts and fab utilization.

Cyclicality in memory and logic investments may also re-emerge, especially if fab customers begin digesting recent capacity expansions. Furthermore, inflation and interest rate dynamics could weigh on customer capital budgets, while normalizing supply chains may reduce Applied’s pricing power on certain tools. These risks, while not currently impairing the long-term narrative, could introduce volatility in quarterly performance and investor sentiment.

What’s the Future Outlook for Applied Materials in 2025 and Beyond?

Looking ahead, Applied Materials appears well-positioned to benefit from secular trends in AI, electrification, and digital infrastructure buildouts. The company’s R&D roadmap aligns with customer needs across advanced process nodes, system-level integration, and next-gen packaging. Management has also hinted at emerging opportunities in quantum computing, high-density DRAM, and advanced lithography collaboration, which could add long-term optionality.

Capital intensity is expected to remain high across foundries and IDMs as they transition to 2nm and beyond. Applied’s installed base is also expanding, which will likely drive growth in services revenue. Additionally, governments around the world, from the U.S. to Japan and India, are supporting domestic chip manufacturing through subsidies and incentives, creating new demand pockets that Applied can tap into.

In summary, while short-term macro and geopolitical dynamics may weigh on the stock, the company’s strategic positioning and innovation leadership suggest continued long-term relevance in the semiconductor manufacturing ecosystem.