Why Applied Materials Stock Sank in October

Shares of Applied Materials (NASDAQ: AMAT) fell 10.1% in October, according to data from S&P Global Market Intelligence. The equipment maker for the semiconductor industry sank after its industry peer ASML Holding (NASDAQ: ASML) reported weak bookings last quarter. Applied Materials is also being investigated for unsanctioned sales to China. Applied Materials stock is up 30% in the last year after the company saw booming demand due to artificial intelligence (AI) spending but has fallen close to 30% from highs set earlier this year.

Here's why Applied Materials stock sank in October.

Manufacturing equipment slowdown and China sales

A declining Applied Materials stock didn't happen because of its own business, but due to a quarterly report from another semiconductor equipment maker called ASML. It said that bookings for new orders were just 2.6 billion Euros last quarter, which was a big disappointment for investors. Wall Street took this as a sign the entire semiconductor equipment market was in a slowdown, which is why Applied Materials stock fell on the same day as ASML.

On top of slowing demand from ASML, Applied Materials is getting investigated by the U.S. government over potential illegal sales of its equipment machines to China. Semiconductor equipment providers have been in the crosshairs of the trade war over semiconductors between China and the United States. The U.S. government doesn't want Western companies to sell advanced equipment to China, which was 32% of Applied Materials' revenue in Q3 of fiscal 2024.

Is the stock a buy?

After this drawdown, Applied Materials trades at a market cap of $151 billion. Its trailing price-to-earnings ratio (P/E) is now 20 and its forward P/E is 18, which are both below the average for the S&P 500 market index. Its products are vital to manufacturers to make advanced semiconductors, which are in high demand due to the growth of AI, cloud computing, and, even still, smartphone devices. The stock has posted a total return over the last 10 years of 839%, making it one of the best-performing large-cap stocks of the last decade, and should keep doing well if the AI spending boom continues.

This doesn't necessarily mean the company is guaranteed to crush it over the next few years, though. Its business has huge exposure to China, and if that segment goes away it wipes out a good chunk of its revenue base. It will take years for other regions to recover these losses, not to mention any fines from the United States government if Applied Materials was actually selling illegally to China. Even though it has been a huge outperformer over the long term, Applied Materials may not be a slam-dunk buy on this October dip.

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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML and Applied Materials. The Motley Fool has a disclosure policy.