Is semiconductor equipment experiencing a “deceleration in valuation”? Damo raised profit expectations for Applied Materials (AMAT.US) but cut target prices

The Zhitong Finance App learned that at a time when Meta Muse and GPT-6 Astra, which was released earlier, are jointly strengthening the market's expectations for the commercialization of AI smart devices and the expansion of AI computing power, thereby significantly boosting the profit trajectory of the semiconductor equipment sector, Wall Street financial giant Morgan Stanley lowered its target price for Applied Materials (AMAT.US), one of the world's largest semiconductor equipment manufacturers headquartered in the US, to $563.

Morgan Stanley began to re-examine the valuation premium for applied materials, so it lowered its target price from $642 to $563, cutting $79, or about 12.3%, while raising revenue and earnings per share forecasts for 2027, and maintaining a “neutral/holding” rating. The signal released by this combination is clear: Damo recognizes profit growth, but believes that the market has already included quite a few favorable factors ahead of time, and the agency favors semiconductor companies whose expectations have not been fully reflected in the valuation.

As Damo lowered its target price, Applied Materials' stock price remained resilient until Monday's close, and eventually closed up 0.36% to around $486.76. Notably, while lowering its target price, Damo raised Applied Materials' 2027 revenue forecast to US$50.7 billion and its earnings per share forecast to US$20.92.

Morgan Stanley lowered the valuation multiplier used for the stock from 26 times to 22 times. The new valuation multiplier is about 10% higher than Applied Materials' 20-fold cross-cycle average valuation multiplier since 2020.

Morgan Stanley analysts said, “The market is willing to trust Applied Materials in the face of uncertainty, and we agree with this judgment; however, we prefer companies whose expectations have not been so fully reflected in valuation multiples.” The agency maintains a “neutral/holding” rating for the stock.

The financial giant expects Applied Materials' gross margin to rise from 48.8% in 2025 to 52% in 2027. The agency's team of analysts added that the valuation of semiconductor equipment companies is usually closely related to gross margin.

Morgan Stanley also said that the agency would be surprised if Applied Materials proposed a path that would enable gross margins to significantly exceed 55% over a long period of time.

Applied Materials said when its quarterly earnings report ended in July was released that based on the long-term needs of customers, the company plans to double the current level of quarterly equipment system output by 2028. According to Morgan Stanley's estimates, if equipment system shipments reach about US$14 billion in the quarter around mid-2028, it may correspond to revenue of about US$68 billion and earnings per share of US$31.70 billion.

Applied materials can be described as ubiquitous in chip factories. Unlike Asmat, which has always focused on the field of lithography, and Lam Research (Fanglin)'s focus is more on etching, cleaning, graphing and key film processes — focusing on high depth-to-width ratio (HAR) etching/deposition and related process capabilities required for advanced HBM storage, high-end equipment provided by applied materials plays an important role in almost every step of chip manufacturing. Its products cover atomic layer deposition (ALD), chemical vapor deposition (CVD), physical vapor deposition (PVD), rapid heat treatment (RTP), CMP, wafer implantation, etc. It is an important core manufacturing process, and its business also covers high-end packaging equipment for advanced packaging/memory chip stacking.

Demand for AI accelerates, but target prices are lowered: as profits continue to rise, applied materials ushered in a “deceleration rate in valuation”

The previous sharp rebound in the semiconductor sector had a clear application catalyst: Muse rapidly popularized and reactivated the AI FOMO trading model. The Philadelphia Semiconductor Index rose more than 4% on September 21. In the week ending September 25, the iShares Semiconductor ETF rose 7.4%. Looking at engineering logic, intelligence expands a question and answer to planning, retrieval, tool call, code execution, and result verification. Multiple rounds of reasoning increase computational requirements, background execution increases CPU load, and operation status and data retention further consume memory and storage. Applied Materials management also clearly stated that smart applications require more CPU-intensive computing architectures and increase DRAM and NAND requirements to provide additional growth impetus for wafer manufacturing equipment.

The semiconductor device side can be described as benefiting from the joint promotion of “demand for expansion of production” and “process upgrading”. Advanced logic chips have a fully surround gate structure, high-rise 3D NAND, and HBM stacking and advanced packaging, improving technical requirements for precision deposition, selective etching, chemical mechanical polishing, and defect control. Demand continues to grow, which may not only drive new production lines, but also increase the need to upgrade existing production lines.

Applied Materials revealed at the August performance conference earlier that the main customer is a rolling eight-quarter demand forecast, and the company is building the capacity to double the current quarterly equipment system output by 2028; this provides a basis for the long-term economy, but production capacity construction goals still need to be converted into revenue through customer procurement, equipment delivery and inspection.

The core of Damo's current target price adjustment is the reduction of the target valuation ratio from 26 times to 22 times, a decrease of about 15.4%. Even so, 22 times is still 10% higher than Applied Materials' average cross-cycle valuation of about 20 times since 2020, highlighting that Damo still accepts a certain growth premium. The controversy centered on how big the premium should be: the agency expects the company's gross margin to rise from 48.8% in 2025 to 52% in 2027, but is cautious about whether it can significantly break through 55% in the future. The core judgment is that the valuation of equipment companies is closely linked to gross margin, and the room for improving profit margins needs to match the valuation given by the market.

According to the Daimo analyst team, the semiconductor equipment market has reached a “valuation deceleration zone” — as industry demand and company profits continue to grow, stock pricing may still be pressured by the market reducing valuation multiples. As a result, investment judgments need to simultaneously measure order fulfillment, profit increases, and premium expectations already reflected in prices. Damo added that the calculation of revenue of about 68 billion US dollars and earnings per share of 31.70 US dollars after the quarterly system shipment volume reached 14 billion US dollars shows an optimistic growth scenario after the expansion of production was realized.