Spend, spend, spend. That’s been the name of the game in the AI boom over the past two years. But really, just how much longer can the industry keep throwing money at bigger and better chips before someone starts asking whether the returns are worth it? Well, Applied Materials might give us a few clues this week.
The semiconductor equipment giant reports earnings on Thursday this week. And just like the rest of the other tech earnings these days, I would be less interested in whether it can beat Wall Street’s estimates. Instead, I’d focus much more on what the company has to say about the next round of spending.
I mean you would think that if the AI investment frenzy is beginning to lose steam, then the companies supplying the tools to build those chips might be among the first to notice.
Everyone loves a gold rush, especially the folks selling the shovels. And in the AI boom, Applied Materials is very much in the business of selling those shovels.
Wall Street is expecting revenue of $10.30 billion and adjusted earnings per share of $4.06, compared with $6.80 billion and $2.17 respectively a year ago. That’s quite a big leap and one that speaks to the relentless spending on advanced chips and manufacturing capacity.
For some context, Applied Materials delivered record revenue of $9.12 billion in the previous quarter with non-GAAP earnings per share of $3.50. At the time, the management laid out an ambitious longer-term outlook, expecting wafer fabrication equipment spending to grow faster through 2030 than over the past decade. However, we have seen how things can quickly change in the past quarter with other big tech firms. So, this is where things might get a little tricky.
The bottom line now is that strong AI demand doesn’t automatically guarantee that the current pace of capital expenditure is sustainable.
Chipmakers are pouring money into manufacturing, high-bandwidth memory and advanced packaging. And Applied Materials sits right in the middle of that spending cycle, supplying the equipment needed to make these growingly more complex chips.
As such, I’ll be watching whether the management continues to see accelerating demand from leading-edge foundry and DRAM customers. Besides that, any indication that orders or capacity expansion plans are being pushed further into 2027 will also be a key signal to watch this week.
But perhaps most importantly is the question of will customers keep spending at this pace if the returns on AI infrastructure investment take longer to materialise?
A more confident outlook could lend support to semiconductor equipment names and the wider AI trade in broader markets. However, any suggestion of slowing investment commitments could revive concerns over how much optimism is already priced into tech stocks.
As has been the case in the past month, markets have come to terms that the AI boom has already delivered plenty of impressive numbers. What they need now is more concrete evidence that the spending can keep going without eventually running ahead of the returns.
And that’s the same narrative in play when looking at Applied Materials’ earnings this week.
This article was written by Justin Low at investinglive.com.