Applied Materials' $1.8 Billion Services Arm Grows 22%

Applied Materials' services division, Applied Global Services, generated a record $1.8 billion in revenue in fiscal Q3 2026, up 22% from a year earlier. That figure represents about 20% of the company's total quarterly revenue of $9.1 billion, according to company results — a large business in its own right for a company most investors know as a seller of chipmaking machines.

The services unit is growing faster than management's long-term expectations. The company expects the services business to grow more than 20% in calendar 2026 and targets a sustainable long-term growth rate in the mid-teens beyond that year. For fiscal Q4 2026, management guided services revenue to about $1.84 billion — again 22% more than a year earlier.

The growth stands in sharp contrast to the stock's performance. Applied Materials shares have fallen 27% over the past three months, while the S&P 500 gained 4.2% over the same stretch.

What Investors Are Worried About

The likely concern is a downturn in chip factory spending. Applied Materials stock has fallen hard in past downturns, including market-wide ones. During the 2022 inflation shock, the stock dropped 53% from peak to trough, compared with a 24% decline for the S&P 500. A holder who bought near the top lost more than half of the value on paper.

Valuation adds to the risk. The stock trades at 37.6 times the past year's earnings — investors pay roughly $38 for each dollar of annual profit — versus 22.5 times for the S&P 500. Applied Materials' own multiple sits near the middle of its ten-year range, leaving less margin of safety against potential operational stumbles at current prices.

The services business answers part of that worry. Management's target of mid-teens annual growth points to a steady business, not a boom that must be repeated. But services cover only about a fifth of revenue.

The machine business remains the dominant driver. Semiconductor Systems brought in a record $7 billion in fiscal Q3 2026, up 27% from a year earlier — faster than services grew. How well services would hold up in a spending downturn is not yet known.

Two Warning Signs to Watch

The first sign of trouble would be services growth cooling from its current 20%-plus pace and falling well short of management's mid-teens long-term target.

The second is cost. Service-related ramp expenses are already spilling over into the broader business. Management guided total company non-GAAP gross margin flat at about 50.4% in fiscal Q4 2026 and tied the flat guide partly to ramp costs, including hiring a large number of customer service engineers.

If that hiring keeps pressing on margins, the company's revenue growth would generate less profit than the headline numbers suggest — the key metric for judging whether the services thesis is holding up.