Applied Materials (Applied Materials (AMAT)) shares slipped in premarket trading Friday, even after the chip equipment maker delivered a blowout third quarter and guided higher. Sometimes the market just wants more, or maybe it's just taking a breather after a massive run.
The company reported revenue of $9.12 billion for the quarter, beating analyst estimates of $8.99 billion. Adjusted earnings came in at $3.50 per share, also topping expectations of $3.40. Revenue rose 15% sequentially and 25% from a year ago.
Record Margins and Cash Returns
Margins were the headline. Adjusted gross margin hit a record 50.4%, up 150 basis points year over year. That's the 13th consecutive quarter of year-over-year gross margin expansion. Adjusted operating margin also set a record at 34%, up 330 basis points from a year earlier.
The company generated more than $3 billion in operating cash flow and $2.3 billion in free cash flow. It returned $860 million to shareholders through $420 million in dividends and $440 million in share repurchases. With $12.8 billion still under its buyback authorization, the company continues to target returning 80% to 100% of free cash flow to shareholders.
AI and DRAM Fuel Growth
Semiconductor Systems revenue reached a record $7 billion, up 18% sequentially and 27% year over year, driven by capacity additions for gate-all-around and FinFET technologies. DRAM revenue, including high-bandwidth memory packaging, jumped 52% from a year earlier to a record. The company also reported record revenue across several Materials Engineering businesses.
Semiconductor Systems adjusted gross margin rose 190 basis points year over year to 55.4%, while adjusted operating profit climbed 45% to a record $2.7 billion.
Applied Global Services revenue rose 22% to a record $1.8 billion, helped by subscription services and strong demand for transactional parts. Its gross margin increased 180 basis points to 35.6%, while operating margin rose 280 basis points to 30.1%.
China accounted for 26% of Semiconductor Systems and Applied Global Services revenue. The company expects growth in the region during 2026, supported by 28-nanometer foundry investment.
During the quarter, Applied Materials launched six new products targeting DRAM, high-bandwidth memory, advanced packaging, and e-beam applications.
Guidance Tops Estimates
On the earnings call, management said the rapid buildout of AI infrastructure is giving the company unusually strong visibility into future demand. Some customer conversations now extend to 2030, while longer-term commitments and rolling eight-quarter forecasts have improved planning.
Based on what it called "unprecedented visibility" from customers, Applied Materials expects another strong record year in 2027.
For the fourth quarter, the company expects revenue of $10.25 billion, plus or minus $500 million, compared with analyst estimates of $9.54 billion. Adjusted earnings are forecast at $3.82 to $4.22 per share, versus estimates of $3.69.
The company also guided Semiconductor Systems revenue to $7.9 billion and Applied Global Services revenue to $1.84 billion.
Management expects AI infrastructure spending to support multiyear growth in leading-edge logic, DRAM, and advanced packaging. Those three areas are expected to represent about 80% of wafer fab equipment growth in 2026 and 2027.
The company has nearly doubled its manufacturing footprint and aims to double quarterly systems output by 2028.
AMAT Price Action: Applied Materials shares were down 5.41% at $505.62 during premarket trading on Friday. The stock has surged 183.97% over the past 12 months.
