Applied Materials, Inc. (AMAT Quick QuoteAMAT - Free Report) has faced a rough patch this year, with its stock sliding 7.3% year to date (YTD). The decline, driven by softer-than-expected guidance and broader market headwinds, has left investors wondering whether to hold or cut losses.

However, despite near-term challenges, Applied Materials’ technological leadership, AI-driven growth potential and attractive valuation make a compelling case for holding the stock. Also, AMAT stock has outperformed the Zacks Electronics – Semiconductors industry as well as peers including Broadcom (AVGO Quick QuoteAVGO - Free Report) , Marvell Technology (MRVL Quick QuoteMRVL - Free Report) and FormFactor (FORM Quick QuoteFORM - Free Report) in the YTD period.

AMAT YTD Price Return Performance

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Short-Term Pressures Weighing on AMAT

The recent dip in Applied Materials shares largely stems from weaker-than-expected guidance during the company’s first-quarter fiscal 2025 earnings report. Management projected second-quarter revenues of $7.1 billion (± $400 million), slightly below the Zacks Consensus Estimate of $7.13 billion. Its non-GAAP EPS guidance of $2.30 (± 18 cents) also fell short of market expectations. The weaker outlook spooked investors, sending the stock down 8.2% in a single session.

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Additionally, U.S. export restrictions on semiconductor equipment sales to China have added to the pressure. Applied Materials expects these restrictions to reduce fiscal 2025 revenues by $400 million, with half of this decline impacting the second quarter. Since China accounts for roughly 30% of AMAT’s total revenues, the restrictions have raised concerns about revenue stability.

The company also acknowledged a slowdown in the IoT, Communications, Automotive, Power, and Sensors (“ICAPS”) segment, which had been a key growth driver in recent years. With ICAPS growth moderating after a strong 2023-2024 cycle, investors are wary of a potential drag on AMAT’s overall performance.

AI and Advanced Packaging: AMAT’s Long-Term Growth Catalysts

Despite the short-term headwinds, Applied Materials’ long-term growth prospects remain highly compelling, thanks to its leadership in AI-driven semiconductor technology.

AI chip demand is fueling a new wave of semiconductor investments, and AMAT is positioned at the forefront of this trend. The company’s expertise in gate-all-around (GAA) transistors, high-bandwidth memory (HBM) and advanced packaging makes it a critical supplier for AI chipmakers.

In fiscal 2024, Applied Materials’ revenues from advanced semiconductor nodes surpassed $2.5 billion. Management expects this figure to double in fiscal 2025, fueled by growing customer adoption of GAA and backside power delivery solutions. These technologies are essential for next-gen AI processing, expanding AMAT’s total addressable market by 15% and driving 30% revenue growth per wafer fab capacity expansion.

The advanced packaging segment is also becoming a significant revenue driver. Applied Materials’ Integrated Hybrid Bonding technology has attracted volume orders from leading-edge customers, cementing its position in next-generation chip manufacturing. The company’s upcoming EPIC Center in Silicon Valley, set to launch in 2026, will further accelerate innovation in packaging and process technology.

AMAT’s Financial Resilience and Strong Execution

Applied Materials’ financial strength reinforces the bullish case for holding the stock. The company has consistently delivered better-than-expected earnings, beating the Zacks Consensus Estimate for four consecutive quarters, with an average surprise of 5.6%.

Applied Materials, Inc. Price, Consensus and EPS Surprise

Applied Materials, Inc. price-consensus-eps-surprise-chart | Applied Materials, Inc. Quote

Analysts expect Applied Materials’ revenues and EPS to grow in the mid-single digits for fiscal 2025 and 2026. This steady growth, despite the near-term headwinds, underscores the company’s resilience and strong execution capabilities.

AMAT’s Valuation Discount Offers Attractive Upside

Applied Materials’ current valuation makes it particularly appealing. The stock trades at a 12-month forward P/E ratio of 15.77, significantly below the industry average of 24.44.

AMAT Forward 12-Month P/E Ratio

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Compared to industry peers such as Broadcom, Marvell Technology and FormFactor, AMAT appears undervalued. Currently, Broadcom, Marvell Technology and FormFactor trade at forward 12-month P/E multiples of 25.47x, 23.23x and 22.44x, respectively.

Given Applied Materials’ dominant position in semiconductor manufacturing and exposure to AI-driven chip growth, this valuation gap signals strong upside potential over the long term.

Conclusion: Hold AMAT for Now

While near-term pressures, including weaker guidance and China-related headwinds, have weighed on Applied Materials stock, the company’s long-term growth trajectory remains highly promising. Its leadership in AI-powered semiconductor manufacturing, advanced packaging technologies and financial stability make it a compelling long-term investment.

For investors, holding Applied Materials stock is the most prudent approach. As AI chip demand accelerates and industry conditions stabilize, this Zacks Rank #3 (Hold) company is well-positioned for sustained growth and a strong rebound. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.