Applied Materials faces worsening operational challenges in China as stricter export controls restrict equipment sales.

Applied Materials delivered a quarter that appears strong on paper but reveals underlying concerns. The company posted $9.12 billion in fiscal third quarter 2026 revenue, a 25% jump year over year, yet investors are fixated on the segment that is shrinking: China. Shares fell more than 4% in after-hours trading following the earnings release, with market concern centered on CEO Gary Dickerson’s outlook for the road ahead.

Applied Materials now projects that tightened U.S. export controls will carve roughly $600 million out of its fiscal 2026 revenue. In the third quarter, China contributed $2.51 billion in sales, representing 28% of total revenue—a sharp decline from 35% a year earlier.

Dickerson was blunt about the dynamics at play. Current restrictions prevent Applied Materials from supplying China’s memory chip manufacturing segments. Consequently, the company’s share of the Chinese wafer fabrication equipment market has contracted to the mid-20% range, a significant retreat from its earlier dominance.

Non-U.S. competitors, particularly firms based in Japan and the Netherlands, are increasingly stepping into the gaps that American restrictions have created. Every quarter that passes without Applied Materials selling into those segments is a quarter where rivals build relationships, install equipment, and earn the follow-on service contracts that make the semiconductor equipment business highly sticky.

Management highlighted AI and DRAM demand as key offsetting factors against the China revenue decline. Bolstered by these trends, the company has revised certain 2026 growth forecasts upward.

The 25% year-over-year revenue growth in the third quarter demonstrates that AI demand is currently more than enough to offset the China losses. The critical question is whether that financial balance will hold over the next several quarters as the full $600 million hit materializes.

Applied Materials is not suffering alone. Close peers Lam Research and KLA face similar operational restrictions in China. Over the past two years, the U.S. export control regime has expanded in scope, moving beyond the most advanced chipmaking tools to encompass equipment used in mature-node and memory manufacturing.

The erosion of China’s contribution from 35% to 28% in just one year represents a trajectory that could compound 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, Applied Materials’ share of the global wafer fabrication equipment market. If non-U.S. competitors are gaining ground not just in China but globally, the competitive implications stretch well beyond one market.

The after-hours sell-off suggests the market is beginning to price in the possibility that China-related headwinds could erode Applied Materials’ valuation premium faster than AI demand can sustain it.