Applied Materials, a leading semiconductor equipment and software manufacturer, has found itself entangled in the ongoing dispute between the United States and China. Despite reporting better-than-expected quarterly earnings, the company's stock experienced a sharp decline after news broke that it was being investigated for shipping products to a Chinese company without the necessary licenses.

The investigation has raised concerns about potential fines and restrictions on future sales in China for Applied Materials. According to Semiconductor Advisers, the company could face significant financial penalties if it is found to have violated export rules. This is particularly troubling considering that China is Applied Materials' largest customer, and the company maintains a substantial operation within the country.

While some analysts, such as those at KeyBanc, have slightly increased their earnings estimates for Applied Materials in fiscal year 2024, others remain more pessimistic. Susquehanna International Group warns of a potential 10% decline in earnings due to expected weakening demand in China.

The U.S.-China dispute over semiconductors has led to tit-for-tat restrictions on exports between the two countries. The United States, in particular, has targeted the most advanced chips out of concern that they could be utilized for military purposes. In response to growing tensions, Chinese tech giant Alibaba recently announced the suspension of its plans to spin off its cloud computing unit.

Amidst these challenges, Chinese Premier Xi Jinping emphasized the importance of fostering friendship rather than adversarial relations during his meeting with President Joe Biden in the United States this week.

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