Applied Materials just delivered a quarter that looks great on paper and worrying underneath. The company posted $9.12 billion in fiscal Q3 2026 revenue, a 25% jump year-over-year, but investors fixated on the part of the business that’s shrinking: China.
The stock dropped more than 4% in after-hours trading following the earnings release. The problem is what CEO Gary Dickerson said about the road ahead.
The $600 million problem
Applied Materials now expects US export controls to carve roughly $600 million out of its fiscal 2026 revenue. China contributed $2.51 billion in Q3, representing 28% of total sales. A year ago, that figure was 35%.
Dickerson was blunt about the dynamics at play. The restrictions prevent Applied Materials from supplying China’s memory chip segments. The company’s share of the Chinese wafer fab equipment market has contracted to the mid-20% range, a sharp decline from its earlier dominance.
Non-US competitors, particularly from Japan and the Netherlands, are increasingly stepping into the gaps that American restrictions have created. Every quarter that passes without AMAT selling into those segments is a quarter where competitors build relationships, install equipment, and earn the follow-on service contracts that make the semiconductor equipment business so sticky.
AI is doing the heavy lifting
AMAT’s management highlighted AI and DRAM demand as key offsetting factors against the China revenue decline. The company even revised some of its 2026 growth forecasts upward on the strength of these trends.
The 25% year-over-year revenue growth in Q3 demonstrates that AI demand is currently more than enough to offset the China losses. The question is whether that math holds over the next several quarters as the $600 million hit fully materializes.
An industry-wide squeeze
Applied Materials isn’t suffering alone. Lam Research and KLA, two of its closest peers in the semiconductor equipment space, face similar operational restrictions in China. The export control regime has expanded in scope over the past two years, moving beyond just the most advanced chipmaking tools to encompass equipment used in mature-node and memory manufacturing.
What investors should watch
The China share erosion, from 35% to 28% in just one year, is the kind of trajectory that compounds painfully if it continues.
Investors should pay close attention to two metrics in the coming quarters. First, China’s percentage of total revenue. If it continues sliding toward the low 20s, the revenue replacement burden on AI-driven segments grows heavier. Second, AMAT’s share of the global wafer fab equipment market. If non-US competitors are gaining ground not just in China but globally, the competitive implications stretch well beyond one market.
The after-hours selloff suggests the market is starting to price in the possibility that China-related headwinds could erode that premium faster than AI demand can sustain it.