Applied Materials (AMAT.US) “High Score” was sold off. Analysts: Market performance is not impressive enough

The Zhitong Finance App learned that after the announcement of the latest results, the stock price of Applied Materials (AMAT.US) fell about 5% before the market on Friday. Many analysts pointed out this because investors' expectations for the company's third quarter results and future prospects for the 2026 fiscal year are already at an extremely high level.

In the third fiscal quarter ending July 26, Applied Materials' revenue increased 25% year over year to US$9.12 billion; non-GAAP earnings per share increased 41% year over year to $3.50, and both revenue and profit exceeded market expectations. For the fourth fiscal quarter, the company expects revenue to be between $9.75 billion and $10.75 billion (median of $10.25 billion), which is higher than the market's consensus estimate of $9.84 billion; non-GAAP earnings per share are expected to fall in the range of $3.82 to $4.22 (median $4.02), while the general market forecast is $4.05.

Additionally, Brice Hill, chief financial officer of Applied Materials, revealed during the performance conference call that the company is planning to expand manufacturing capacity. “In fact, we added more than 1,500 new employees in our global manufacturing and AGS customer support departments this quarter. We are also preparing for the next phase of capacity expansion to ensure that we can handle the higher demand that may occur until 2030.”

Additionally, CEO Gary Dickerson said that continued demand in the fields of DRAM storage technology, logic chip foundry, and advanced packaging will drive growth for the company.

He pointed out, “In the competition for AI technology leadership, cutting-edge logic foundry, DRAM, and advanced packaging have the greatest impact on AI computing performance, energy efficiency, and cost. These are areas where Applied Materials' strong leadership position and next-generation innovative solution reserves will support revenue and profit growth in 2027 and beyond. We are working closely with our customers to innovate products through service, process diagnosis and control, and capacity to optimize yield, output, and fab climbing efficiency.”

Despite a strong performance report and an optimistic outlook for the fourth quarter, Seeking Alpha analyst Kenio Fontes pointed out that Applied Materials' current valuation fully reflects high expectations, and there is a limited margin of safety for new investors.

Fontes further stated, “Although this outlook is better than market consensus, it may still disappoint some investors because previous expectations were too high. Some analysts previously predicted that revenue for the fourth quarter could reach 10.3 billion US dollars. Although the median figure given by the company was 10.25 billion US dollars, many expectations were higher. Although I think this outlook is quite reasonable, some analysts may think that although the growth momentum is good, it has not reached the level of popularity they had imagined. At the end of the day, the valuation of applied materials is not low, and must continue to exceed expectations to support the current valuation multiples.”

Applied materials and other chip equipment manufacturers (such as ASML.US)) have been the main beneficiaries of the increase in AI infrastructure capital expenditure, but this trend also means that market expectations have been pushed to a high level before earnings reports are released.

Peer KLAC.US (KLAC.US) experienced a similar fate after the release of the earnings report — although the fourth-quarter results and outlook both exceeded expectations, the stock price fell due to excessive investor expectations. However, the stock price of Fanlin Group (LRCX.US) surged after the quarterly report was released. Analysts pointed out that under the impetus of the AI boom, chip manufacturers such as TSM.US have raised their capital expenditure plans, which is beneficial to chip equipment manufacturers and the AI chip sector as a whole. Since the beginning of the year, the stock price of Applied Materials has increased by about 108%, Asmack and Kelei have risen by about 72% respectively, while Fanlin Group has risen by about 96%.

CFRA analyst Brooks Idlet said that although Applied Materials' performance and forecasts were insufficient to make Wall Street excited, the overall performance is still steady, and the growth momentum clearly continues to improve. “We believe there is still room for improvement in market consensus expectations for calendar year 2027 if the recent strength continues.”

Morgan Stanley slightly lowered its price target from $646 to $642 and maintained a “neutral” rating.

A team of analysts led by Shane Brett pointed out, “Applied Materials' performance was good, but it wasn't amazing — and in this earnings season, we have seen several outstanding performances in the semiconductor equipment sector, and the slight gaps are significant. We have summarized two major points: 1) 2026: The growth of applied materials is leading the WFE (Wafer Front-End Equipment) market less than we had previously anticipated. We lowered our 2026 system shipment growth rate forecast from 44% to 42%, which is only slightly higher than our expected WFE growth rate of 37%-40%; 2) Gross profit margin: We believe that in the long run, semiconductor equipment gross margin reflects' value ', while short-term gross margin has more room for active regulation.”

Analysts added that they are not particularly concerned about the company's monthly gross margin for the October quarter, as the company is clearly speeding up capacity expansion and employee recruitment to support the WFE market's goal of reaching 300 billion US dollars by the end of this decade. “However, this guidance does put Applied Materials into the category of 'continuing to prove themselves' on the issue of gross margin expansion.”

RBC Capital Markets raised the target price from $520 to $600 and maintained an “outperforming market” rating. Analysts led by Srini Pajjuri said, “Applied Materials' fiscal third quarter results and fourth quarter revenue guidance were better than market expectations. However, the increase in gross margin was slightly more moderate than that of its peers, partly due to rising production capacity costs and the strong performance of the business sector. We are not overly concerned about this, and we expect gross margin to gradually expand, supported by a strong WFE environment (which we expect to continue for three years), thanks to improved shipments and pricing.”

Meanwhile, Jefferies maintained a “buy” rating and a target price of $770. Analyst Blayne Curtis's team said, “The semiconductor systems business growth rate may rise to more than 40% in the 2026 calendar year (continuing to outperform WFE), and 2027 is expected to usher in another year of strong growth. Customer order visibility has now been extended to 2030, Applied Materials plans to double production capacity by 2028, and is evaluating room for further expansion in 2030. Applied materials are still our most promising semiconductor equipment target because they have good layout advantages in the fields of cutting-edge logic, DRAM, and advanced packaging.”

Citi also maintains a “buy” rating and a target price of $710.