Every AI Chip on Earth Needs This Company's Machines. The Stock Is Down 44%.

Research Desk · September 18, 2026

A finished silicon wafer. Every die on it passes through hundreds of manufacturing steps before it becomes a chip.

On Wednesday, the Federal Reserve did something it had not done since July 2023. It raised interest rates.

The quarter-point hike lifted the benchmark range to 3.75% to 4.00%. Fed Chair Kevin Warsh said plainly that inflation is too high and has been for too long, and most officials now expect at least one more increase before year's end.

Stocks sold off on the news, then bounced hard on Thursday. The S&P 500 rose 1.14% and the Nasdaq gained 1.69%, with chip stocks leading the recovery. Futures pointed higher again Friday morning.

For a patient investor, the more useful story is the list of first-rate companies that fell sharply this summer without a single disappointing quarter.

Near the top of that list sits Applied Materials, a company most people have never thought about but whose equipment sits inside almost every advanced chip factory on earth.

The Company That Sells the Ovens, Not the Bread

Think of the chip industry as a bakery business. Nvidia, AMD, and the tech giants designing their own AI chips are the famous bakers. Their names are on the box.

Applied Materials sells the ovens, mixers, and proofing cabinets. Before any chip can exist, its factory has to lay down and carve away atomically thin layers of material, hundreds of times over. Applied makes many of the machines that do that work.

That position matters. Bakers compete fiercely for customers. The oven maker gets paid by every one of them.

There is a second, steadier business underneath. Once a machine is installed, it needs parts, upgrades, and service for years. Applied Global Services brought in $1.78 billion last quarter.

It works much like an elevator company that keeps collecting maintenance fees on every elevator it ever installed. The new-equipment side swings with the cycle. The service side keeps billing.

A Record Quarter, and a Bigger One Guided

The fiscal third quarter, reported in August, set records across the board. Revenue reached $9.12 billion, up 25% from a year earlier.

Profitability improved faster than sales. Adjusted gross margin rose to 50.4%, adjusted operating margin climbed to 34.0%, and adjusted earnings per share jumped 41% to $3.50.

Management called it the highest sequential revenue growth in the company's history, and credited AI for "unprecedented demand." Leading-edge logic chips made up 67% of equipment sales, with memory chips used in AI servers making up most of the rest.

The guidance was stronger still. Applied expects roughly $10.25 billion in revenue this quarter and adjusted earnings near $4.02 a share. The company also raised its outlook for its equipment business to 30% growth in calendar 2026, up from 20%.

Cash followed the earnings. Operating cash flow was $3.04 billion for the quarter, and $860 million went straight back to shareholders through buybacks and dividends.

And this week, at a major industry conference in India, the company announced plans to invest $5 billion there over the next decade, including a 140-acre research park and a tenfold expansion of its local supply chain. Management is clearly planning on a multi-year horizon.

The One Blemish: It Still Trades Like a Chip Stock

Honesty requires naming the real drawback. This is a volatile stock, and the last three months prove it.

Shares fell 11.2% in a single session on July 1, when chip stocks were sold after a huge first half. They dropped again after the August report, even though it beat expectations. By Thursday, the stock stood roughly 44% below its June peak.

Nothing in the business broke. The stock had simply run too far, too fast, and a record quarter was no longer enough to surprise anyone.

There is also a policy risk. China has historically been one of Applied's largest markets, and U.S. export rules on advanced chip equipment keep tightening. A new restriction can hit sales with little warning.

For a retirement portfolio, that means position size matters. This is a quality business wrapped in a stock that can lose a third of its value in a season.

What You Pay, and What Could Go Wrong

At $417.40, Applied trades near 36 times trailing earnings and about 24 times forward estimates. That is well below where it sat in June, when the same company was priced for perfection.

Wall Street remains firmly positive. The consensus rating across 39 analysts is a Strong Buy, and the average price target sits near $641, more than 50% above Thursday's close.

The dividend is small today, $2.12 a share per year, or roughly a 0.5% yield. What stands out is the direction. The company raised it 15% in March, its ninth consecutive annual increase, and over the past decade it has returned nearly 90% of its free cash flow to shareholders.

Now the bear case, with a number attached. A year ago, before the AI spending surge fully arrived in its results, this stock traded near $174. If chipmakers pause their spending, or if rising rates squeeze the price investors will pay for growth, a return toward that range is not unthinkable.

Higher rates matter here in a specific way. Chip factories cost tens of billions of dollars to build, and more expensive money can slow the pace at which customers break ground.

The Bottom Line

Applied Materials is one of the few ways to own the AI buildout without betting on which chip designer wins. It sells the tools to all of them and services those tools for years afterward.

The business just posted its best quarter ever and guided to a better one. The stock, meanwhile, has given back nearly half its summer peak.

For investors who can tolerate the swings and size the position sensibly, this week's Fed-driven turbulence may simply be the window to take a closer look at a company the market loved at $740 and seems to have forgotten at $417.