Applied Materials’ outlook appears somewhat muted due to China trade issues: analysts

Applied Materials’ (NASDAQ:AMAT) second quarter financial results revealed strong demand trends in advanced logic and NAND, but exposure to China partially offsets its growth outlook, according to analysts.

Shares were down about 5% during early market trading on Friday. Competitors Lam Research (LRCX), KLA Corp. (KLAC) and ASML (ASML) were all down less than 1%.

“Applied materials delivered in-line Apr-Qtr revenue results, better GMs and slightly better EPS and provided an in-line (versus consensus) Jul-Qtr revenue/GM and slightly better EPS outlook reflecting strong spending trends in advanced foundry/logic/DRAM, technology transitions in NAND, partially offset by weak mature/lagging edge technology spending (primarily China which was down 21% Q/Q in the April-Qtr),” said J.P. Morgan analysts Harlan Sur and Peter Peng, in a Friday investor note.

J.P. Morgan maintained its Overweight rating but reduced its price target to $210 from $240.

“We see lower spending in China, with investments in both DRAM and mature logic down for the year,” said Applied Material CEO Gary Dickerson, during the company’s earnings call.

However, Applied Materials is increasing its sales in other regions.

“In 2024, we under-performed the market in China, due to the market access restrictions imposed on U.S. companies,” Dickerson said. “At the same time, outside of China, we grew faster than our peer group thanks to our strength in leading edge foundry and DRAM. Trade restrictions have also had an impact on our service business. Despite these headwinds, we grew our core parts and services revenues in the low double-digit range last year, and we are on track to deliver a similar growth rate in 2025.”

“We’ll have a record next quarter, and we’re saying for the whole year, even despite losing — not being able to serve some of those accounts in China, we will have low double-digit growth in the core business, so without that 200-millimeter,” said Applied Materials Chief Financial Officer Brice Hill.

“Despite robust trends in leading-edge F/L and advanced DRAM/HBM, AMAT’s higher trailing-edge exposure (we est. roughly 1/3 of overall sales vs. ~20-30% for peers) is a drag on growth in CY25 mainly tied to moderating China mix,” said Bank of America Securities analysts, led by Vivek Arya, in a note.

BofA maintained its Buy rating and $190 price target.

Meanwhile, Morgan Stanley reiterated its Underweight rating and slightly lowered its target to $162 from $164. Long term, the tariff and export control issues could be beneficial if it drives more multinationals to spend in the U.S.

“The US appears to be shifting to more stick than carrot when it comes to spending incentives – tariffs replacing subsidies – but particularly if phased in gradually those incentives could be significant,” said Morgan Stanley analysts, led by Joseph Moore.

Finally, Needham maintained its Buy rating and $195 target. The investment bank pointed out Applied Materials’ strong gross margin.

“Gross margin was 49.2%, a record high for the company,” said Needham analysts Charles Shi and Ross Cole. “This is achieved when Taiwan revenue mix is high and China revenue mix is low, which in the prior years would have led to GM declines. Management also highlighted strength in process control also contributed to the GM strength, as PDC revenue reached a quarterly record, driven by leading-edge foundry/logic demand.”