Applied Materials Caps Record Year, But We’re Still Trimming Our Price Target

Following another vibrant quarter for Applied Materials (AMAT), Wall Street consensus on earnings per share figures for 2027 and 2028 are moving higher. But the price targets? They are going in the opposite direction.

Let’s examine why the divergence, but first, let’s look at the consensus on EPS. The figure for next year is now at $19.32, up from $18.75, and greater visibility has lifted the consensus figure for 2028 to $25.75 from $23.91. Normally that would lift AMAT shares, but instead Wall Street is dialing back price targets, implying more conservative multiples than before. Given the current environment, that’s not entirely unexpected. But those cuts still point to ample upside for AMAT shares. Meanwhile, AMAT’s quarter was characterized by continued strong demand and further signs of pricing power.

Where are those Wall Street folks taking their AMAT price targets? From the information we have so far, the bulk of those new targets are clustered between $500 and $600 down from $580 to $700. And we’ve also seen one price target increase to $500 from $475, with a few more outliers point up and down.

When we look at those new expected EPS figures for 2027 and 2028, they call for Applied to nearly double its EPS compared to the $12.89 posted for its now finished fiscal 2026. Based on last night’s closing share price, that puts AMAT shares around 14.8-times expected 2028 EPS, a discount to the S&P 500. That tells us the shares are undervalued given the level of expected growth as more fabs come on stream and lines at existing ones are expanded to address the current chip shortage that is expected to persist well into 2027 if not 2028.

Adding more than some credence to that outlook are the forecasts from the hyperscalers, more recently the neoclouds, Cerebras (CBRS) and Cisco (CSCO) last night, not to mention the committed spending levels from Anthropic. There are also the comments about tight chip capacity for markets outside of AI and data center, namely, the PC, smartphone, automotive markets to name a few.

So, against those demands that will be addressed in the coming years, why the price target cuts. First, they follow dialed back valuations we’ve seen in other areas of tech. There is also the growing expectation, especially after today’s October producer price index, report the Fed will need to do a bit more to break inflation. Third, for now at least, financing this multi-year buildout of AI and data center capacity still has some funding questions that need to be addressed.

In our view, it’s that combination that is leading Wall Street to skinny down valuation multiples for AMAT shares.

Even though an $800 price target only equates to a price-to-earnings-to-growth ratio of 1.3-times on the new consensus 2027 consensus EPS figures and 1-times with the one for 2028, we too are going to use more conservative multiples. As some of those issues are addressed, subject to where the market is trading, and as Applied delivers on those increased EPS expectations, we should see those target valuation multiples expand.

With that said, we will trim our price target to $600, which despite the cut, still offers significant upside from current levels. Heck even the lower end of new Wall Street price target range offers more than 30% upside. So, if you did not pick up some additional AMAT shares when the Portfolio did earlier this week, let today’s price target cuts wash over the shares before you make a move with this “One rated” holding. Given the position size based on last night’s market close near 3.7%, we’re not inclined to add more near current prices, but a wider market pullback would put the shares near the top of our potential shopping list.

Applied’s Quarter and Guidance

Applied Materials closed out fiscal 2026 with record results at the top end of its guidance range. October-quarter revenue rose 53% year over year and 14% sequentially to $10.41 billion and adjusted gross margin climbed 250 basis points from a year ago to 50.6%, the 14th straight quarter of year-over-year expansion. Non-unadjusted earnings per share hit a record $4.16, up 92%. Both lines topped expectations, with EPS $0.10 ahead of the $4.06 FactSet consensus and revenue of $10.41 billion edging past the $10.30 billion consensus.

Management shared that gross margin in the quarter benefited from favorable mix and higher pricing, and that Applied is raising prices on new tools as they deliver more value to customers in yield and output. Moving further down that path, Applied targets lifting gross margin by 5 points and operating margin by 10 points by 2030.

During the earnings call in response to questions about if any customers are delaying any deliveries of Applied equipment, the company answer was “no,” with management saying that customers keep asking Applied to ship faster. In our view that bodes well for further pricing action that should support the revised bottom-line expectations discussed above. Management also commented that demand for advanced chips is well above supply, and pointed to supply constraints in PCs, smartphones and TVs as a buffer if data center demand were to cool. Based on spending levels discussed above from hyperscalers, neoclouds and others, the probability of that cooling is low.

Applied generated a record $2.6 billion in free cash flow in the quarter and returned $2.4 billion to shareholders, including $2 billion in buybacks, its largest quarterly repurchase in more than eight years. Exiting the quarter, Applied had $10.8 billion remaining under its current share buyback authorization and management reiterated that it expects to distribute 80% to 100% of free cash flow to shareholders over time. In our view, the demand outlook and prospects for higher margins bodes rather well for cash flow and the likelihood Applied continues to increase its dividend as well as continue to buyback shares.

Segment Review

Semiconductor Systems. The equipment business delivered record revenue of $8 billion, up 64% year over year, with record sales in Korea and Taiwan and records in DRAM and advanced packaging. By product, Applied posted record revenue across deposition, etch, chemical mechanical polishing and process control. Segment gross margin rose 240 basis points to 55.2%, and operating margin jumped more than 940 basis points to 39%. Applied expects Semi Systems revenue to grow more than 40% in calendar 2026, with advanced packaging up about 90% and inspection and metrology up more than 50%.

Applied Global Services (AGS). The services business posted record revenue of $1.9 billion, up 26%, with records in both services and spare parts. Gross margin rose 100 basis points to 35.1%, and operating margin improved nearly 170 basis points to 30.5%, the second straight quarter above 30%.

Other, led by Display. Other revenue was $517 million, in line with expectations, as Display had a strong quarter. CFO Bryce Hill told investors to model Display at roughly $400 million per quarter going forward, with gross margins around 40% and operating margins in the 20s. Applied is reinvesting those profits in adjacent businesses, so it expects the Other segment to run at about breakeven.

At the time of publication, TheStreet Pro was long AMAT.