AMAT Earnings Preview: AI‑sector Optimism Points to Opportunities for Semiconductor Equipment

$Applied Materials(AMAT)$   is expected to release its earnings report after the market closes on August 13th. Recently, traditional cloud giants and Neoclouds' AI CapEx have seen better-than-expected returns on their investments. Continued order increases from cloud vendors will indirectly lead to upward revisions of their forward guidance for wafer fab equipment procurement.

I. Core Outlook

Market expectations for AMAT's FY26-Q3 (quarter ending July 2026) call for revenue of $9.004 billion, corresponding to year-over-year growth of +23.3%, a significant acceleration from the prior quarter's 11.4% YoY growth. EPS is expected at $3.3944, showing YoY growth (FY25-Q3 actual EPS was $2.22, implying YoY growth of approximately 52.9%).

Key factors shaping expectations:

AI chip demand spilling over to equipment makers. $Taiwan Semiconductor (TSM.US)$ 's July revenue grew 44.7% YoY, with AI chip demand remaining robust.

The FY25-Q3 revenue base was relatively moderate, while the FY25-Q4 base was even lower. The low base effect provides favorable conditions for high YoY growth in Q3 and subsequent quarters.

II. Key Watch Points

1. Semiconductor Systems revenue and growth sustainability

This segment contributes approximately 75% of the company's revenue and is the most critical metric in this earnings report. In FY26-Q2, segment revenue was $5.965 billion, up +13.5% YoY and +16.0% QoQ, both showing acceleration. The market's expectation of 23.3% overall revenue growth in Q3 is highly dependent on whether Semiconductor Systems can sustain or exceed this growth trajectory. Close attention should be paid to the capex pace of AI-related advanced logic/foundry and memory customers (HBM-related).

2. Applied Global Services growth stability

This segment generated $1.665 billion in revenue in FY26-Q2, up +6.3% YoY and +6.8% QoQ, with steady but slower growth than Semiconductor Systems. As a recurring revenue source, the stability of the AGS business is crucial to overall revenue quality. If AGS growth accelerates, it will enhance revenue visibility; if growth slows, it may partially offset the strong performance of Semiconductor Systems.

3. Whether gross margin can reach 50% threshold

FY26-Q2 gross margin has already reached 49.9%, approaching the key psychological level of 50%. If Q3 gross margin can break above 50%, it will significantly strengthen market confidence in sustained earnings expansion; conversely, if it falls back below 49%, concerns about a margin ceiling may arise. Attention should be paid to the support from product mix changes (advanced packaging, EPIC platform, and other high-value-added products) on gross margin.

4. Operating cash flow and capex pace

FY26-Q2 operating cash flow was only $845 million, with free cash flow of $210 million, relatively low compared to the $7.91 billion revenue base. If Q3 cash flow fails to improve, it may raise market concerns about earnings quality, especially against a backdrop of high revenue growth.

III. Valuation & Expectations

The current stock price is $548.15, corresponding to a PE (TTM) of 51.57x and a forward PE of 35.49x. Based on annualized FY26-Q3(E) EPS of $3.3944, the earnings expectations implied by the forward PE are already quite full.

IV. Potential Upside & Risks

Factors that could exceed expectations

Accelerated transmission of AI equipment demand. TSMC's July revenue grew +44.7% YoY, and strong AI chip demand is transmitting up the supply chain to upstream equipment makers. AMAT's leading position in deposition, etch, ion implantation, and other key processes makes it a core beneficiary of AI chip capacity expansion. If Q3 order visibility improves further, revenue could exceed expectations.

Advanced packaging and EPIC platform contribution. UC Berkeley joining AMAT's EPIC center strengthens the company's technology positioning in advanced packaging and heterogeneous integration. Demand for advanced packaging equipment is growing rapidly with increasing AI chip complexity, potentially becoming a new growth driver beyond the traditional semiconductor equipment cycle.

Factors that could disappoint or weigh on results

Cash flow quality concerns. FY26-Q2 free cash flow was only $210 million, far below net income of $2.806 billion, representing a significant gap. If Q3 cash flow still shows no meaningful improvement, the market may question earnings quality, especially under high growth expectations.

"Perfect pricing" risk at elevated valuations. The current forward PE of 35.49x already implies relatively high growth expectations. Even if earnings meet expectations, if guidance is not significantly raised, the stock may still face pressure from "buy the rumor, sell the news."

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