AI And Advanced Packaging Will Reshape Semiconductor Landscape

Key Takeaways

• Leadership in materials engineering and advanced packaging positions the company to benefit from AI-driven semiconductor demand and global manufacturing expansion.
  
• Growing recurring revenues and deep customer collaboration provide margin resilience and support long-term financial growth amid industry transitions.
  
• Heavy reliance on a few major customers and regions, along with geopolitical and industry volatility, threaten revenue stability and intensify competition risks.

Catalysts

Engages in the provision of manufacturing equipment, services, and software to the semiconductor, display, and related industries.

• Structural growth in AI and high-performance computing is reshaping semiconductor demand, driving heavy investments in advanced chip architectures such as gate-all-around (GAA) transistors, high-bandwidth memory (HBM), and advanced packaging. Applied is set to benefit from these device inflections due to its leadership in materials engineering and strong customer adoption of new process technologies, which are expected to deliver outsized revenue and market share gains as these nodes ramp from 2026 onward.
  
• The ongoing explosion in data creation and rapid adoption of digital transformation (IoT, automotive, industrial automation) continue to accelerate wafer fab buildouts globally-over 100 new fabs or expansions tracked this year-with Governments incentivizing regional manufacturing. Applied's broad portfolio and investments in local manufacturing infrastructure (e.g., new Arizona and EPIC centers) position it to capture a greater share of this growing and more geographically diverse capital expenditure, supporting both revenue growth and margin resilience.
  
• Advanced packaging remains Applied's area of highest market share, bolstered by strong customer collaboration and a growing pipeline of new hybrid bonding and integration technologies. The packaging segment is on track to more than double to over $3B in annual revenue in the next few years, which will meaningfully boost recurring revenue and expand overall net margins given the higher margin profile of these offerings.
  
• Recurring revenues from services and spares now comprise over two-thirds of the service segment's income, and the installed base continues to expand with each leading-edge and memory ramp. This increases earnings visibility, supports stable net margins, and buffers against near-term cyclicality or regional slowdowns, providing a more resilient financial profile.
  
• Despite current short-term uncertainty due to China digestion and fab order linearity, Applied's deep engagement and early-stage co-innovation with leading customers at major architecture transitions gives confidence that the company will capture incremental share and revenue as the AI wave, memory upgrade cycles, and advanced module integration all accelerate over the next several years, driving robust long-term EPS and revenue growth.

Applied Materials Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Applied Materials's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.9% today to 28.3% in 3 years time.
• Analysts expect earnings to reach $9.2 billion (and earnings per share of $11.94) by about September 2028, up from $6.8 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.4x on those 2028 earnings, up from 19.1x today. This future PE is lower than the current PE for the US Semiconductor industry at 33.5x.
• Analysts expect the number of shares outstanding to decline by 3.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.18%, as per the Simply Wall St company report.

Applied Materials Future Earnings Per Share Growth

Risks

• Ongoing geopolitical tensions and export license uncertainties-especially with China, Applied's largest market-create persistent risks to revenue visibility and market share; prolonged delays or restrictions on export licenses could lead to a significant, sustained revenue decline from this region.
  
• High customer concentration in leading-edge logic (foundry/logic) and memory, with order linearity heavily tied to a few dominant customers, increases vulnerability to demand swings and capital spending delays, impacting both revenue stability and earnings visibility.
  
• Volatility and digestion cycles in end markets, particularly in China and mature node ICAPS, as well as muted leading-edge investment timing, could result in near
• to medium-term revenue and margin contraction as long as excess fab capacity persists.
  
• Increasing R&D investment-necessary to compete at AI and advanced technology inflections-comes with risk that escalating expenses may not translate into proportionate, timely revenue growth if delayed customer adoption or execution missteps occur, compressing future net margins.
  
• Intensified global competition, including from emerging Asian semiconductor equipment firms, combined with potential technological paradigm shifts and uncertainties around new markets, threatens long-term pricing power, share gains, and future revenue expansion.

Valuation

• The analysts have a consensus price target of $194.903 for Applied Materials based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $240.0, and the most bearish reporting a price target of just $160.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $32.5 billion, earnings will come to $9.2 billion, and it would be trading on a PE ratio of 20.4x, assuming you use a discount rate of 10.2%.
• Given the current share price of $163.5, the analyst price target of $194.9 is 16.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.