How AMAT (Applied Materials) Makes Money in 2026: A Deep-Dive With Income Statement

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Understanding how a semiconductor equipment manufacturer like Applied Materials makes money is essential for investors and anyone interested in the business of semiconductors. In this post, we break down Applied Materials's quarterly income statement (Q1 2026) using a Sankey chart to visualize the financial flows — what comes in, where it goes, and what's left as profit.

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Quick Applied Materials Overview

Applied Materials operates as a leading provider of materials engineering solutions used to produce virtually every new chip and advanced display in the world. Revenue comes primarily from sales of semiconductor equipment, services, and related technologies across segments like Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. The company benefits from strong demand in AI, high-performance computing, and advanced node technologies.

Revenue Breakdown

• Total Revenue (Q1 2026): $7.0B (-2.1% YoY)
  • Revenue: $7.0B (100% of total)
  • Growth is powered by steady demand for chip manufacturing equipment, offset by market cyclicality in the semiconductor industry.

Gross Profit and Margins

• Gross Profit: $3.4B (49.0% gross margin)
  • Cost of Revenue: $3.6B (-2.5% YoY)
  • Applied Materials maintains robust margins due to its scalable manufacturing processes, high-value intellectual property, and efficient supply chain in the semiconductor equipment sector.
• Most costs come from materials, manufacturing labor, and components for wafer fabrication equipment.

Operating Income and Expenses

• Operating Income: $1.8B (-15.8% YoY, 26.1% margin)
• Operating Expenses: $1.6B (+21.4% YoY)
  • R&D: $0.9B (+8.0% YoY, 13.2% of revenue) — focused on next-generation technologies like advanced packaging, EUV lithography support, and AI-driven chip innovations
  • SG&A: $0.4B (-11.0% YoY, 5.9% of revenue) — covers sales efforts, administrative functions, and global operations
  • Applied Materials continues to prioritize innovation while maintaining efficiency through cost controls amid rising R&D investments.

Net Income

• Pre-Tax Income: $2.3B (+9.9% YoY, 33.2% margin)
• Income Tax: $0.3B (13.0% effective tax rate)
• Net Income: $2.0B (+71.0% YoY, 28.9% net margin)
• Applied Materials converts a high portion of sales into profit due to scalability, pricing power in specialized equipment, and other income contributions.

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What Drives Applied Materials's Money Machine?

• Semiconductor Systems: ~80%+ of revenue / core equipment sales for wafer fabrication, driving the majority of growth in advanced nodes
• Applied Global Services: Key metric with recurring revenue; supports installed base with spares, upgrades, and maintenance for stable cash flows
• R&D Investments: Heavy focus on innovation in deposition, etch, and inspection tools to maintain technological leadership
• Future growth areas: Expansion into adjacent markets like displays and next-gen packaging, though cyclical demand poses risks

Visualizing Applied Materials's Financial Flows

The Sankey chart below visualizes how each dollar flows from gross revenue, through costs and expenses, down to net income. This helps investors spot where value is created, what areas weigh on profits, and how efficiently the company operates.

• Most revenue flows into gross profit, with operating expenses (especially R&D) taking the largest chunk.
• Even after significant investments, 28.9% of revenue drops to the bottom line.

Key Takeaways

• Applied Materials's money comes overwhelmingly from semiconductor equipment sales
• High gross and net margins illustrate the power of Applied Materials's asset-light, IP-driven business model
• Heavy investment in R&D, balanced by efficiency in operating costs
• Ongoing growth is driven by AI chip demand and services backlog

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FAQ About Applied Materials's Income Statement

1. What is the main source of Applied Materials's revenue in 2026?

Applied Materials generates over 80% of its revenue from semiconductor systems and equipment. Additional revenue comes from services and display markets.

2. How profitable is Applied Materials in Q1 2026?

Applied Materials reported net income of $2.0B in Q1 2026, with a net margin of approximately 28.9%, reflecting strong profitability driven by high gross margins and other income.

3. What are the largest expense categories for Applied Materials?

The biggest expenses on Applied Materials's income statement are operating expenses, particularly Research & Development (R&D) and Sales, General & Administrative (SG&A) costs. R&D investment reached $0.9B in Q1 2026, as Applied Materials prioritizes advanced semiconductor technologies.

4. Why does other operating areas operate at a loss?

Certain areas, despite contributing to revenue, face pressures from cyclical demand, posting variability in operating performance in Q1 2026. This is because Applied Materials aggressively invests in R&D and global expansion, believing these will drive long-term growth—even if margins fluctuate today.

5. How does Applied Materials's effective tax rate compare to previous years?

Applied Materials's effective tax rate in Q1 2026 was 13.0%, consistent with previous years. This low rate is primarily due to tax benefits from international operations and share-based compensation.