Image Source: Unsplash
 

Applied Materials (AMAT), one of the world’s largest suppliers of semiconductor manufacturing equipment, is bracing for a significant financial setback as new US export restrictions tighten the flow of chipmaking tools to China.

The company disclosed in a filing Thursday that the rules could reduce its revenue by $710 million over the next two years, adding to mounting challenges in a critical market.

Applied Materials shares fell 2.32% to $218.40 on Friday afternoon session.

Revenue impact 
 

The Bureau of Industry and Security’s updated restrictions mean Applied Materials will need a license to export certain products to China-based customers.

The company estimates the measures will cut $110 million from its fourth-quarter revenue and shave $600 million from its 2026 results.

China accounts for roughly 30% of Applied Materials’ sales so far this year, making the restrictions a meaningful headwind.

Stifel analyst Brian Chin noted that the company had already signaled a sharp decline in Chinese sales and now faces an additional drag.

He projected a 10% quarter-on-quarter sales decline for the fourth quarter.

Investors responded cautiously on Friday.

Applied Materials stock fell over 2%, while its industry peers Lam Research and KLA also edged lower, falling 0.28% and 2.46% respectively.

Despite the pullback, shares of all three companies have posted strong gains in 2024, reflecting broader industry momentum.

Sector strength offsets short-term pressure
 

The new restrictions are unlikely to erase the impressive gains semiconductor equipment suppliers have delivered this year.

Applied Materials stock is up 37% year-to-date as of Thursday’s close, while Lam Research has surged 104% and KLA has advanced 81%.

Those gains have been supported by rising demand for wafer fabrication equipment (WFE), a crucial segment for the global semiconductor supply chain.

However, US policy efforts to curb China’s domestic chipmaking ambitions add a layer of uncertainty.

The Trump administration is targeting Chinese semiconductor independence, which could pressure US suppliers in the near term.

At the same time, the restrictions may accelerate Beijing’s efforts to achieve self-sufficiency, creating longer-term risks for the industry.

China represents between 20% and 25% of the global WFE market, according to Rothschild & Co Redburn analyst Timm Schulze-Melander.

Domestic Chinese equipment makers already command 11% to 13% of global market share in certain segments, signaling rising competition for US firms.

Rising competitive pressures
 

Among US suppliers, Applied Materials is seen as particularly vulnerable to Chinese competition.

Schulze-Melander highlighted the company’s reliance on its Physical Vapor Deposition (PVD) equipment business, which accounts for nearly one-third of its operating profits.

That segment is at risk of losing share to local rivals as China expands its domestic capabilities.

“Our analysis concludes that while almost all semicap equipment suppliers face some degree of challenge from China-based rivals, Applied Materials’ earnings base is the most threatened by China competition,” Schulze-Melander wrote in a recent note.

The analyst has a Neutral rating and a $190 target price on Applied Materials, suggesting limited upside from current levels.

While the company retains a strong market position and benefits from global chip demand, the combination of export restrictions and intensifying competition in China presents a material challenge to its longer-term growth trajectory.

More By This Author: