Demand for semiconductor equipment continues to be strong! Wall Street is optimistic that Applied Materials (AMAT.US) will expand its market share, and that valuation adjustments will not change the logic of growth

The Zhitong Finance App learned that semiconductor equipment giant Applied Materials (AMAT.US) announced strong results for the fourth quarter of fiscal year 2026. Revenue, adjusted earnings per share, and performance guidelines for the next fiscal quarter all exceeded market expectations. Despite recent increases in the artificial intelligence (AI) and semiconductor sector fluctuations, demand for equipment in the fields of advanced logic chips, dynamic random access memory (DRAM), and advanced packaging is still strong. Wall Street banks Bernstein and Morgan Stanley both confirmed the business performance of Applied Materials in their newly released research reports. However, considering the current market environment and valuation factors, both institutions lowered their target price for the stock.

Financial reports show that for the fourth quarter of fiscal year 2026 ending October, Applied Materials' revenue increased 53.1% year-on-year to US$10.409 billion, higher than market expectations of US$10.269 billion; adjusted earnings per share were US$4.16, higher than US$2.17 and market expectations of US$4.06 in the same period last year. The adjusted gross margin was 50.6%, up about 250 basis points year on year, higher than market expectations of 50.4%; adjusted operating margin was 35.3%, up about 670 basis points year on year.

By business, Applied Materials' semiconductor systems business revenue for the fourth fiscal quarter increased 64% year over year to US$7.996 billion, up 14% month on month, and operating margin reached 39%. Among them, revenue from foundry and logic chip equipment increased 44% year over year to US$4.638 billion; revenue from DRAM equipment increased 93% year over year to US$2,639 million; and revenue from flash memory equipment increased 146% year over year to US$720 million.

Bernstein pointed out that although sales of foundry and logic chip equipment fell short of market expectations, strong sales performance of DRAM and NAND flash memory devices drove the overall revenue of the semiconductor systems business to exceed expectations.

In addition, Applied Materials' global services business revenue increased 26% year over year to US$1,896 million, with an operating margin of 30.5%; revenue from other businesses, including display equipment, increased 25% year over year to US$517 million. The company's fourth fiscal quarter free cash flow reached US$2.6 billion, and approximately US$2,421 million was returned to shareholders through share repurchases and dividends.

In terms of performance guidance, Applied Materials predicts that revenue for the first quarter of fiscal year 2027 will be between 10.6 billion and 11.6 billion US dollars, with a median value of 11.1 billion US dollars, higher than market expectations of 10.869 billion US dollars; adjusted earnings per share are expected to be 4.15 to 4.55 US dollars, with a median value of 4.35 US dollars, which is also higher than market expectations of 4.26 US dollars. The adjusted gross margin is expected to rise further to 50.8%, and the adjusted operating margin is expected to reach approximately 35.5%.

What is more noteworthy is that Applied Materials management once again raised its forecast for semiconductor equipment sales growth in the natural year 2026, which is currently expected to increase by more than 40%. The company also expects the global wafer manufacturing equipment (WFE) market to grow by more than 30% in 2027, and its own equipment sales growth rate is expected to once again exceed the overall level of the industry.

Management believes that advanced process foundry and logic chips, DRAM, and advanced packaging will continue to be the main driving force for equipment demand growth. It is estimated that these three fields will contribute about 75% of the increase in the global wafer manufacturing equipment market by 2030. At the same time, the mature process equipment business for applications such as the Internet of Things, communications, automobiles, power and sensors is also expected to resume growth, providing additional growth impetus for the company.

Bernstein analyst Stacy Rasgon said that in the context of recent drastic fluctuations in the AI and semiconductor industry, Applied Materials' financial performance is quite steady. Despite investors' concerns about the prospects for AI investment and data center construction, demand for wafer manufacturing equipment is still growing rapidly, and the visibility of industry growth is constantly increasing.

The analyst pointed out that the main factor currently limiting the release of demand for semiconductor equipment is still the progress of wafer factory cleanroom construction. As more clean rooms are put into use one after another, demand for equipment is expected to be further released. Applied Materials revealed that in the past few quarters, more than 10 new fab construction projects were added each quarter, and the number of fab expansion projects after 2028 is increasing.

To meet strong demand in the next few years, Applied Materials is expanding its production capacity. It plans to double the semiconductor system equipment output capacity by FY2028 compared to the fourth quarter of FY2026, and to more than double the current level by 2030.

According to Bernstein, this means that if market demand is strong enough, Applied Materials may have the capacity to produce semiconductor equipment worth nearly 16 billion US dollars each quarter by 2028, which is about double the current quarter's equipment sales scale.

Based on strong performance and industry growth prospects, Bernstein raised Applied Materials' 2027 revenue forecast from US$46.5 billion to US$48.2 billion, raised the 2028 revenue forecast from US$57.1 billion to US$58.9 billion, and projected a further increase in revenue to US$69.2 billion for the 2029 fiscal year.

The bank also raised the adjusted earnings per share forecast for Applied Materials for the 2027 fiscal year from $18.30 to $19.35, raised the adjusted earnings forecast per share for the fiscal year 2028 from $23.66 to $25.07, and expected the adjusted earnings per share for the 2029 fiscal year to reach $30.49.

However, considering the current market environment, Bernstein lowered the price-earnings ratio used in the valuation from 33 times to 24 times, and lowered the target price of applied materials from $700 to $600 to maintain the “outperforming market” rating. Based on the stock's closing price of $380.95 on November 12, the new target price still means about 58% potential upside.

Bernstein believes that as long as AI capital expenditure continues to grow, wafer manufacturing equipment will still be an important area for investors to participate in the growth of the AI industry. Applied Materials has a good business layout in high-growth markets such as advanced logic chips, DRAM, and advanced packaging, and its stock valuation is still attractive compared to most major semiconductor equipment peers.

Morgan Stanley, on the other hand, is relatively cautiously optimistic about the performance of applied materials. The bank's analyst Shane Brett said that the overall performance of Applied Materials' financial report was steady, but there were no unexpected factors that could significantly change its investment views.

Morgan Stanley expects Applied Materials' semiconductor systems business revenue to grow by 42% in the 2026 natural year, which is 2 to 3 percentage points higher than the bank's forecast of 39% to 40% growth in the global wafer manufacturing equipment market, indicating that the company is expanding its market share.

The bank is particularly optimistic about the progress of applied materials in the field of advanced packaging and process control. Applied Materials expects revenue growth of its advanced packaging business by around 90% in 2026, driven by demand for high-bandwidth memory (HBM). Morgan Stanley believes that this growth rate is expected to enable applied materials to establish a leading position in the advanced packaging market, and its advantages in the field of HBM and 3D logic chips will also lay the foundation for continued strong growth in 2027.

Meanwhile, the revenue of the applied materials process control business is expected to increase by more than 50% in 2026, reaching more than 2.6 billion US dollars. Morgan Stanley admits that the data previously quoted in the research report significantly underestimated the business scale of applied materials in the field of process control. If the business continues its strong growth momentum in 2027, it may have an important impact on the competitive landscape in related fields.

However, Morgan Stanley also pointed out that the current inventory level and supply capacity of applied materials are worth paying attention to. The company's inventory turnover days for the fourth fiscal quarter fell to 120 days, the lowest level since July 2021. As customers demand early delivery of equipment, Applied Materials is meeting customer needs as much as possible, which has also driven its equipment business to grow by more than 40% this year.

Bryce Hill, chief financial officer of applied materials, said that if all required parts were fully supplied, the company's revenue guidance for the first fiscal quarter could be slightly higher. Morgan Stanley believes that this has raised questions about whether applied materials can fully meet the further growing demand for equipment.

Additionally, Morgan Stanley is re-evaluating the prospects for increasing demand for different types of semiconductor devices in 2027. The bank currently expects the advanced logic chip device market to grow by 51%, the DRAM device market by 40%, and the NAND flash memory device market by 26% in 2027. If the growth rate of demand for DRAM and advanced logic chip equipment exceeds the overall level of the wafer manufacturing equipment industry, it will benefit the business performance of applied materials.

In terms of valuation, Morgan Stanley pointed out that based on the bank's profit forecast for the 2028 natural year, the current price-earnings ratio of Applied Materials is about 15 times, 1 to 2 times lower than Fanlin Group (LRCX.US), and 3 to 4 times lower than KLAC.US (KLAC.US). However, considering the differences between companies in terms of growth prospects, gross margin, and business execution, the bank believes that the current valuation discount of applied materials is still reasonable.

Morgan Stanley lowered the target price-earnings ratio for Applied Materials' 2028 natural year from 22 times to 20 times, and lowered the target price from $538 to $507, maintaining a “wait and see” rating. The new target price still has a potential increase of about 33% compared to the stock's closing price on November 12.