Applied Materials' Q1 2026 Earnings Call Reinforces AI Growth Amid Unchanged China and Regulatory Risks

What happened

Applied Materials reported Q1 2026 earnings, with management highlighting sustained AI-driven demand for leading-edge logic and DRAM/HBM tools, aligning with the DeepValue report's base case of mid-teens WFE growth. The call confirmed expectations that 2026 will be a growth year, as non-China regions like Taiwan and Korea are projected to offset a quantified $600 million export headwind from China, but it avoided new positive surprises on this front. Management reiterated warnings on China exposure, including the deferred BIS Affiliates Rule snapback risk in late 2026 and ongoing DOJ/BIS/SEC investigations, which could exacerbate revenue losses beyond current estimates. Despite operational efficiency gains from recent workforce reductions, the stock's valuation at ~34x trailing EPS remains elevated, pricing in a smooth AI upcycle with little margin for safety against these headwinds. Investors are thus faced with a familiar narrative: robust near-term execution clouded by structural challenges that keep the risk-reward skewed negatively at current prices.

Implication

The Q1 results demonstrate Applied Materials' operational strength in capturing AI and memory capex, supporting near-term financial targets and reinforcing the bull case for non-China WFE growth. However, the call's emphasis on unchanged China headwinds and regulatory uncertainties highlights that over 30% of revenue remains vulnerable to policy shifts and localization trends, which could trigger earnings disappointments. With the stock trading near $301 and crowded bullish sentiment, any negative developments—such as tighter export controls or faster Chinese competitor gains—could lead to sharp multiple compression toward the bear case value of ~$220. Therefore, new capital should await a pullback to the attractive entry point of $240 or clearer evidence from upcoming catalysts like TSMC capex updates that non-China growth can durably offset China drags. Existing investors might consider trimming positions above $345, as per the DeepValue report, to mitigate downside risk while monitoring 90-day checkpoints for early warning signals.

Thesis delta

The Q1 2026 earnings call does not shift the core thesis from the DeepValue report; it reaffirms that Applied Materials is executing well in an AI-driven upcycle but faces unchanged high risks from China exposure and regulatory overhangs. If anything, the lack of new positive guidance on mitigating China headwinds or resolving legal issues slightly reinforces the downside asymmetry, keeping the 'WAIT' rating and conviction level of 3.5 appropriate. Investors should watch for thesis breakers, such as China revenue declining faster than expected or BIS rule changes, before considering a more bullish stance.