Accelerating AI demand lifts a high-quality toolmaker
- Management expects the semiconductor equipment business to grow well above 30% in calendar 2026.
- Advanced packaging revenue is expected to grow more than 70% in calendar 2026.
- Applied Global Services is forecast to grow more than 20% in 2026 with a mid-teens sustainable growth target.
- China accounted for 28% of total revenue in Q3 fiscal 2026, meaning export controls still matter heavily.
- New global and U.S. tax regimes will drag on earnings starting in early fiscal 2026.
AI is pulling orders forward and boosting margins
Applied Materials is one of the key suppliers behind the AI chip buildout. Chipmakers use its tools to shape, add, remove, measure, and connect tiny layers of material on wafers. That work matters more as chips move to Gate-All-Around transistors, backside power, High-Bandwidth Memory, and advanced packaging.
The current thesis shows immense underlying strength. Management stated that the calendar 2026 growth outlook for the semiconductor equipment business is now tracking above the prior 30% target. Advanced packaging is a breakout star. The services business is also accelerating, now expected to grow more than 20% in 2026. Crucially, the previously weak ICAPS segment has returned to growth.
However, new structural headwinds have emerged alongside execution risks. The company has to double its manufacturing capacity by 2028 to meet demand, while navigating supply chain vulnerabilities tied to Chinese rare earth export controls. Furthermore, global minimum tax laws and U.S. tax reform will materially increase foreign taxes starting in early 2026.
There is also a price question. The company is profitable and tied to AI, but the market knows that. A good business can still be a tough stock if investors already expect near-perfect execution and ignore impending tax burdens.
Machines first, service for years
AMAT makes money by selling chipmaking equipment to semiconductor manufacturers. These are large, complex tools used inside fabs, which are factories that make chips. The company also sells services, spare parts, and factory automation software through Applied Global Services.
The equipment business is cyclical because chipmakers spend in waves. When customers build new fabs or move to a new chip design, orders can rise fast. When customers pause spending, revenue can slow. This is why the current capacity ramp matters so much.
The service business smooths that cycle. AMAT has long-term service agreements that generate recurring revenue. As the installed base of tools grows, AGS can grow even when new tool demand cools.
The moat comes from breadth. AMAT sells tools across many steps in chipmaking, so it can help customers tune several processes together. That is valuable when each new chip generation gets harder to build. The company has successfully used value-based pricing to lift overall gross margins above 50%.
Where AMAT is aiming
Leading-edge logic
AMAT sells tools for Gate-All-Around transistors and backside power delivery. This is a primary driver of the current equipment surge.
Advanced packaging
Advanced packaging connects multiple chips so they act like one larger system. This business is expected to grow more than 70% in calendar 2026.
Applied Global Services
AGS sells services, spares, and factory automation software. Management expects it to grow more than 20% in 2026.
DRAM and HBM
DRAM is memory used in computers and AI systems. High-Bandwidth Memory is a key AI driver and a major growth area for AMAT.
ICAPS
ICAPS covers chips for IoT, communications, autos, power, and sensors. After a period of weakness, management expects this segment to return to growth this year.
Process Diagnostics & Control
E-beam and optical inspection products that enable fab yield improvements. These products are expected to grow more than 50% in calendar 2026.
The revenue mix
Segment mix relies on historical disclosures, with Semiconductor Systems historically around 75% of revenue and AGS around 21%. In Q3 fiscal 2026, China represented 28% of total revenue.
What can break the thesis
Execution risk on massive capacity additions
High impact · Medium oddsThe company aims to double its quarterly manufacturing capacity by 2028 to satisfy AI demand. AMAT needs suppliers, logistics, and customer cleanrooms to line up at the same time. A delay in any one link could push revenue into later periods.
Margin dilution if AI demand normalizes
Medium impact · Medium oddsGross margins have structurally shifted higher, surpassing 55% for systems. The massive capacity additions planned for 2028 could increase fixed costs or dilute gross margins if AI demand cools down sooner than expected.
China exposure and supply chain risks
High impact · Medium oddsChina accounted for 28% of total revenue in Q3 fiscal 2026. Export controls remain a live business risk, and the Chinese government has implemented export controls on rare earth minerals used in AMAT products. New rules from either side could shrink the accessible market or disrupt production.
New tax regimes drag on earnings
Medium impact · High oddsGlobal minimum tax laws and U.S. OBBBA tax reform will materially increase foreign taxes and potentially impair deferred tax assets. These new regimes will act as a direct drag on earnings starting in early fiscal 2026.
Too much revenue depends on a few buyers
High impact · Medium oddsTwo customers historically account for a large portion of revenue. That gives AMAT strong visibility when those customers are spending. It also creates risk if one customer delays a fab, changes tool choices, or cuts capital spending.
In one breath
What does Applied Materials actually make?
Applied Materials makes equipment used inside chip factories. Its tools help deposit, remove, modify, measure, and connect materials on silicon wafers so customers can build advanced chips.
Why is Applied Materials tied to AI?
AI chips need leading-edge logic, advanced memory, and advanced packaging. AMAT sells tools used in all three areas, so AI data center spending can drive demand for its equipment.
Is Applied Materials a services company too?
Yes. Applied Global Services sells service contracts, spare parts, and factory automation software. This business is expected to grow more than 20% in 2026 with mid-teens sustainable annual growth.
What is the biggest near-term risk for AMAT?
The biggest near-term risk is execution. Management has to double its manufacturing capacity by 2028 to meet demand, which requires perfect timing across supply chains and customer factories.
Sources and research notes
This page combines Finn's company research with public filings and other cited materials. The thesis is reviewed when material company information changes; Finn Scores use the latest available scoring data.
- Thesis reviewed
- September 13, 2026
- Score data
- September 27, 2026
- Reviewed by
- Shivam Bharuka
Comparable Semiconductor Equipment & Materials companies
Companies near Applied Materials, Inc. in Finn's Semiconductor Equipment & Materials industry ranking.
