Applied Materials' NAND Surge Masks Lingering China and Valuation Risks

What happened

Applied Materials' NAND flash memory sales nearly doubled to $1.41 billion in FY25, boosted by 3D NAND upgrades and new metrology tools, as reported in a recent article. This aligns with the DeepValue master report's note of increased memory exposure, where NAND reached 7% of Semiconductor Systems revenue in FY25, reflecting broader AI-driven demand tailwinds. However, the report critically underscores that at a share price of $301, AMAT is already priced for a smooth AI-driven wafer fab equipment upcycle, with a quantified $600 million FY26 export headwind from China. Despite the NAND momentum, China still represents about 30% of revenue, facing structural share loss to local competitors and open-ended legal risks from ongoing investigations. Thus, while the sales jump confirms strength in a high-growth segment, it does not mitigate the core investment challenge of balancing cyclical gains against persistent regulatory and valuation pressures.

Implication

The NAND sales doubling underscores AMAT's competitive edge in memory equipment, potentially supporting near-term revenue and margin stability as AI and HBM demand accelerates. In the medium term, this could bolster the bull case if it signals sustained share gains in high-value segments, yet the DeepValue report warns that current valuations at 34x trailing EPS leave little room for error. Importantly, the report emphasizes that China's 50% domestic-equipment rule and export controls pose a structural threat, with bear scenarios projecting revenue declines that could compress multiples toward $220. Therefore, investors must weigh this positive development against the asymmetric downside risks from policy shifts and competitive erosion in China. Ultimately, the implication is to maintain a cautious stance, as the report recommends waiting for a pullback to $240 or clearer evidence that non-China growth can durably offset China drags.

Thesis delta

The NAND sales increase modestly reinforces the bullish memory and AI growth thesis but does not alter the fundamental 'WAIT' rating. The DeepValue report's core argument remains unchanged: high valuation and unresolved China risks necessitate patience. A significant thesis shift would require either a price drop to the attractive entry level or concrete signs that non-China capex growth is structurally outpacing regulatory headwinds.