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Staying true to recent form, Applied Materials (AMAT) delivered upside 2Q25 earnings, driven by strong non-GAAP gross margin expansion of 170 bps yr/yr to 49.2% and resilient demand for advanced node technologies. However, AMAT is trading sharply lower, reflecting disappointment with the company's in-line Q2 revenue of $7.10 bln and cautious Q3 revenue guidance of $6.70-$7.70 bln, with the midpoint merely aligning with consensus. The negative reaction also stems from elevated expectations that were amplified by competitor Lam Research's (LRCX) strong earnings report on April 23. Investors were likely anticipating a more pronounced top-line beat and forward-looking optimism particularly given the AI-driven surge.

• The Semiconductor Systems segment -- AMAT's largest revenue driver -- posted Q2 revenue of $5.26 bln, up 7% yr/yr, but slightly below analysts' expectations. This segment, which manufactures equipment for wafer fabrication, including deposition, etching, and inspection tools, continues to benefit from the AI technology boom, particularly in foundry-logic applications. However, the segment faced headwinds from reduced spending in China, a key market, where DRAM and NAND investments slowed, partially offsetting AI-driven gains.
• The slight revenue shortfall in the Semiconductor Systems segment reflects supply chain constraints and geopolitical tensions impacting China exposure, which tempered the otherwise robust AI-fueled momentum. On the plus side, non-GAAP operating margin for the segment remained strong, expanding by 150 bps yr/yr to 36.4%, supported by a favorable product mix skewed toward high-margin advanced tools.
• The Applied Global Services segment, which provides aftermarket services, spare parts, and equipment upgrades for semiconductor manufacturing, experienced modest revenue growth of 2% to $1.57 bln. This segment serves a broad range of markets, including foundries, logic, and memory chipmakers, with products like preventive maintenance programs and yield optimization services. Growth was underpinned by higher equipment utilization rates at customer fabs and an expanding installed base, particularly for advanced nodes requiring intensive servicing.
• For Q3, AMAT issued cautious in-line revenue guidance, reflecting several factors, including ongoing softness in China, where reduced DRAM and NAND spending is expected to persist, and potential supply chain bottlenecks amid geopolitical uncertainties. Additionally, the company cited a normalization of demand following an AI-driven surge, suggesting a potential pause in customer capital expenditure as they digest recent investments. AMAT has a history of issuing conservative guidance, often setting a low bar to ensure achievable targets, as evidenced by its consistent EPS beats in prior quarters.

AMAT delivered a solid Q2 with a strong EPS beat, underscoring its operational strength and leadership in semiconductor equipment. However, the in-line revenue and cautious Q3 guidance, against a backdrop of heightened expectations fueled by AI demand and Lam Research’s (LRCX) stellar results, have overshadowed the earnings upside, driving a sharp sell-off in AMAT shares.