AMAT hits its highest gross margin in 25 years as AI chip demand, premium products and services fuel profitability growth.
Applied Materials $AMAT AMAT is demonstrating significant margin expansion driven by its strategic positioning in AI-related semiconductor equipment markets, differentiated technology portfolio and operational leverage. In the second quarter of fiscal 2026, AMAT achieved its “highest gross margin in more than 25 years,” reflecting strong execution and a favorable product mix.
AMAT reported a non-GAAP gross margin of 50%, up 80 basis points year over year, while operating margin expanded to 32.1%, representing an increase of 140 basis points. A key driver of margin expansion is Applied Materials’ leadership in high-value semiconductor technologies such as leading-edge foundry-logic, DRAM and advanced packaging. Management expects these categories to account for more than 80% of wafer fab equipment spending growth in 2026.
The high-value semiconductor technologies market carries higher profitability because customers prioritize performance, power efficiency and manufacturing precision over cost alone. AMAT’s differentiated products, including Trillium ALD and Precision PECVD systems, support premium pricing and stronger margins. The company also highlighted that gross margin improvement has been supported by value-based pricing from its most differentiated products, coupled with ongoing manufacturing cost innovations.
In addition, Applied Global Services (AGS) is contributing to margin stability and recurring profitability. AGS delivered record revenue growth of 17% year over year, benefiting from higher fab utilization and AI-powered service offerings. The company’s AIx platform now connects more than 35,000 chambers, enhancing predictive maintenance and productivity.
AMAT’s expanding margins reflect strong AI demand, premium products and disciplined operational execution. However, stiff competition from other wafer equipment manufacturers remains a concern for AMAT.
Lam Research $LRCX LRCX secured multiple critical etch wins at a major DRAM manufacturer with its new Akara etch system, which supports 3D DRAM architectures. This was supported by LRCX’s customer investments in DDR5, LPDDR5 and high-bandwidth memory. Additionally, Lam Research’s Aether dry-resist technology was recently selected as the production tool of record for a leading DRAM customer, securing a foothold in this high-growth segment.
ASML $ASML Holding ASML is experiencing strong demand from DRAM and logic customers, which are ramping leading-edge nodes using ASML’s NXE:3800E EUV systems. Additionally, ASML noted that multiple DRAM customers are adopting EUV lithography, which helps in shortening cycle time and lowering costs. However, AMAT offers a broad range of WFE products that do not compete directly with ASML and Lam Research, making it a stock worth holding.
Shares of Applied Materials have surged 69.9% year to date compared with the Zacks Electronics - Semiconductors industry’s growth of 39.8%.
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From a valuation standpoint, Applied Materials trades at a forward price-to-sales ratio of 9.81X, higher than the industry’s average of 9.33X.
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The Zacks Consensus Estimate for Applied Materials’ fiscal 2026 and 2027 earnings implies year-over-year growth of 19.8% and 27.7%, respectively. The estimates for fiscal 2026 and 2027 have been revised upward in the past seven days.
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Applied Materials currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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