Solar is taking some of the shine off of an Applied Materials Inc. (AMAT) recovery.

Applied Materials' traditional business, making the tools used by companies to make semiconductors, is showing some signs of life after years wading through a brutal market. But its newer business selling a ready-made line of manufacturing tools to solar panel makers appears to be holding the company back.

The company reported third-quarter results Tuesday that topped Wall Street expectations, driven by sequential revenue gains in its businesses selling and servicing machines used to make chips. Its solar unit, however, saw a significant revenue drop.

The solar business comprises tools to make both traditional silicon-based solar panels and thin-film panels - a cheaper but less efficient alternative. And while its silicon and thin-film businesses have suffered from difficult conditions in the solar sector, the thin-film business raises additional concerns.

To address the thin-film market, Applied Materials sells a full assembly line of tools, known as SunFab. Companies can purchase the full system and essentially flip a switch to begin cranking out panels. So far, Applied has sold six such systems.

While its silicon solar business sells products to larger, well-capitalized firms such as SunPower Corp. (SPWRA), the smaller solar companies SunFab targets have been hardest hit recently, as financing has dried up and prices for panels have plunged, hurting revenue and leading to losses. Many can't afford new manufacturing lines, and are delaying purchases.

Meanwhile, firms may also find a ready-made solution less appealing as they try to top competitors in price and efficiency.

Farhad Moghadam, the newly appointed Chief Executive of Ascent Solar Technologies Inc. (ASTI) and a former executive in Applied Materials' solar unit, said that proprietary designs and intellectual property - not ready-made manufacturing processes - will lead to success in the solar industry.

"I don't believe the turn-key is the right direction to go for any panel manufacturer," said Moghadam.

Some analysts have raised similar concerns.

"Applied Materials' problem is that it has invested a lot of money and a lot of energy into a product that the market might not want, and that is the SunFab thin-film line," said Auriga analyst Daniel Berenbaum.

The costs to get this business up and running have been significant. Berenbaum estimates that the majority of Applied Materials' overall capital spending is going towards SunFab infrastructure. The company doesn't make this data public.

For its part, Applied Materials stands behind the business. In a conference call to discuss third-quarter results, the company said 2009 would be a year for improvements in operations.

"We're at the point where it's very easy to question it," said Applied Materials Chief Financial Officer George Davis on the SunFab business, in an interview with Dow Jones Newswires. "We're thinking of the long-term fundamentals."

Thin-film, he said, has the greatest potential to compete in the market over the long term.

Investors appear satisfied with the company's overall results, as shares recently rose 2.8% to $13.59 Wednesday. Since the beginning of the year, Applied Materials shares are up about 34%, slightly below its peers. The Philadelphia Semiconductor Index, or SOX, has gained about 39% over the same period.

Still, as Applied Materials works to pull itself towards recovery, continued weakness in SunFab could prove an albatross.

The solar unit reported an operating loss of $53 million last quarter while Applied's other businesses turned a combined operating profit of $75 million.

"I've always viewed [the solar business] as a wild-card," said Berenbaum. "Wild cards can be good, or wild cards can be bad."

-By Jerry A. DiColo; Dow Jones Newswires; 212-416-2155; jerry.dicolo@dowjones.com