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The integration of artificial intelligence into materials science has accelerated property prediction and high-throughput screening. Yet, the field’s progress hinges on models’ ability to generalize beyond their training distributions. Existing literature often addresses generalization in broad terms, focusing on out-of-distribution performance or extrapolation without distinguishing the qualitative nature of material novelty. This conceptual manuscript introduces a novel theoretical framework for categorizing generalization in materials AI into three distinct levels: new compositions (variations within known structural families), new structures (alternative atomic arrangements or topologies), and new physics (emergence of phenomena governed by mechanisms absent from the training data). Drawing on recent advances in graph neural networks, scalable deep learning, and materials representations, we synthesize evidence that current models achieve reasonable interpolation within familiar domains but encounter progressively greater difficulties across these levels. The proposed distinction provides a structured lens for analyzing model limitations, interpreting benchmark results, and guiding the design of future architectures and training strategies. By formalizing these categories, the framework aims to advance theoretical understanding of generalization in materials AI, emphasizing the need for targeted approaches at each level to enable reliable discovery of novel materials.