Investment Thesis
Applied Materials demonstrates exceptional profitability with 32.4% net margins and a pristine balance sheet (0.22x debt-to-equity), but concerning margin compression (-2.5% net income decline YoY despite 4.4% revenue growth) signals operational headwinds. Modest revenue growth and deteriorating profitability momentum offset the company's fortress balance sheet and strong cash generation.
Strengths
- Exceptional profitability metrics (49.5% gross margin, 29.4% operating margin, 32.4% net margin)
- Fortress balance sheet with minimal leverage (0.22x debt-to-equity) and strong liquidity (2.51x current ratio)
- Robust cash generation with $1.2B free cash flow and 36.9x interest coverage ratio
- Strong returns on capital (20.2% ROE, 12.0% ROA) demonstrating efficient capital deployment
- Healthy cash position of $6.3B providing strategic flexibility
Risks
- Margin compression evident in net income declining 2.5% YoY while revenue grew 4.4% - suggests cost control and operational challenges
- Modest revenue growth rate (4.4%) insufficient for semiconductor capital equipment industry leadership
- High operational leverage exposes profitability to any further revenue headwinds
- EPS growth essentially flat (0.6% YoY) despite asset base and shareholder equity growth indicates profitability stagnation
- Operating expense ratio appears to be increasing relative to revenue, reducing net income leverage
Key Metrics to Watch
- Gross margin trend - any further compression would indicate structural pricing or cost challenges
- Operating margin trajectory - critical to assess if operational headwinds are transient or structural
- Revenue growth acceleration - need sustained growth above 5-6% to justify capital intensity
- Free cash flow conversion rate and operating cash flow margins - to confirm profitability challenges aren't deteriorating cash generation
Financial Metrics
Revenue
14.9B
Net Income
4.8B
EPS (Diluted)
$6.05
Free Cash Flow
1.3B
Total Assets
40.3B
Cash
6.3B
Profitability Ratios
Gross Margin
49.5%
Operating Margin
29.2%
Net Margin
32.4%
ROE
20.2%
ROA
12.0%
FCF Margin
8.4%
Balance Sheet & Liquidity
Current Ratio
2.51x
Quick Ratio
1.80x
Debt/Equity
0.22x
Debt/Assets
40.7%
Interest Coverage
36.90x
Long-term Debt
5.3B
Disclaimer: This analysis is generated by AI based on publicly available SEC EDGAR filings.
It does not include stock price data and should not be considered financial advice.
All fundamental data is sourced from SEC public domain filings.
Always conduct your own research before making investment decisions.
Data Source: SEC EDGAR |
Analysis Date: 2026-05-22T07:23:26.047169 |
Data as of: 2026-04-26 |
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