Applied Materials Beat Everything but Wall Street's Expectations for Margins

Applied Materials delivered record quarterly revenue of $9.12 billion, including the highest sequential revenue growth in company history. Applied Materials guided fourth-quarter revenue and adjusted EPS above Wall Street expectations, while its gross-margin outlook remained flat sequentially. Applied Materials is investing to double quarterly system output by 2028 as customers provide longer-term demand forecasts tied to AI chip capacity. Applied Materials Inc. NASDAQ: AMAT sold off after its Q3 earnings report, despite the largest quarter-over-quarter revenue gain in company history. In fact, the company shredded analysts’ top- and bottom-line estimates, announced guidance above consensus, and stepped up nearly every major 2026 outlook. And then the stock dropped 6% after hours. Why the drop into such a large beat? Expectations are high for a company like Applied Materials, even after a 10% pullback in the last few weeks. Any potential red flag is immediately noticeable, and in this case, it's the gross margin line that stands out like an NFL lineman at the grocery store checkout. Back in May, Applied Materials made an audacious guidance call during its fiscal Q2 2026 report . After reporting record quarterly revenue of $7.91 billion, earnings per share (EPS) of $2.86, and a 25-year high in gross margins at 50%, management raised Q3 revenue guidance to $8.95 billion. It also projected more than 30% year-over-year (YOY) growth in its semiconductor equipment business in calendar year 2026. How did these bold projections come to pass? The company's fiscal Q3 2026 report was released post-market on Aug. 13, and Applied Materials surpassed analysts’ consensus (plus its own projections) with $9.12 billion in revenue. The non-GAAP $3.50 EPS figure also surpassed analysts’ estimates of $3.40, and represented year-over-year (YOY) growth of nearly 30%. Semiconductor Systems accounted for $7.0 billion of the $9.12 billion in revenue, up 27% YOY with a 55.4% gross margin. Management’s Q4 revenue guidance estimates ranged from $9.75 billion to $10.75 billion, with an EPS range of $3.82 to $4.22. It also projects Semiconductor Systems to exceed its previous “greater than 30%” forecast in fiscal 2026, with $7.9 billion in projected Q4 revenue , and continued growth into fiscal 2027. The midpoint of both ranges came in above market consensus, but these projected sequential growth rates are “just” 11% and 12%, respectively, lower than the results achieved in the most current quarter. Getting dinged for double-digit revenue and EPS projections at the midpoint is a rare sight, but expectations are sky high for a pricey tech stock up more than 100% year-to-date (YTD) and currently trading at 50 times earnings and nearly 15 times sales. Ignore the data showing these numbers growing 51% and 85% YOY; the company faced heavy export restrictions in Q4 2025 that depressed quarterly figures. Management guided non-GAAP gross margins to 50.4% in Q4...