The Risk We Identified for Applied Materials Has Been Realized, Now What?

Let’s follow up on our initial comments about Applied Materials (AMAT) and corresponding pullback in the shares on Friday morning.

As we suspected could happen, despite posting a top- and bottom-line July quarter beat and offering guidance that was ahead of the market consensus, those lofty whisper expectations combined with the pre-earnings run in the stock are weighing on the shares.

The two question for us here at the Portfolio are the following:

1) Was there anything different that would alter the reasons why we became owners of AMAT shares?

2) If not, where would be inclined to add some additional shares to our holdings?

Let’s figure out those answers, but those of you who read those initial comments earlier on Friday, you can probably figure out the answer to the first question.

First, the numbers. For company’s July 2026 quarter, revenue surged 25% year-over-year and 15% quarter over quarter to $9.12 billion. Margins expanded across both time frames leading Applied to report a 41% year-over-year increase in EPS to $3.50. Both top- and bottom-line numbers beat estimates. Cash flow form operations continued to climb, with free-cash slow rising quarter over quarter even as Applied put its share repurchase program to work, buying back another $40 million in stock during the quarter.

In terms of the guidance that left some on Wall Street wanting, Applied guided its top-line for the current October quarter to between $9.75 billion to $10.75 billion. The midpoint of that guidance, $10.25 billion, is way ahead of the $9.84 billion market consensus, and equates to just over a 50% year-over-year increase. It’s also another double-digit increase sequentially. As we trace those figures back, they are supported by rising capex levels from key chip vendors like TSM (TSM), Micron (MU), Samsung (SSNLF), SK Hynix (SKHY) and others.

During the earnings call, management confirmed the favorable pricing environment and pointed to it help lift margins further in the coming quarters. That helps explain why management’s bottom-line guidance for the current quarter of $3.82 to $4.22 with a midpoint at $4.02 is up 15% sequentially and 85% year over year.

With tight chip capacity expected to remain in place through 2027 and into 2028, that favorable pricing environment should remain in place, helping Applied deliver another year of significant top- and bottom-line growth in oncoming quarters. That not only keeps us bullish on AMAT shares, it also explains why we are seeing some price targets on Wall Street move to $575 to $600 from $500 to $530.

For now, we’ll keep our AMAT target at $800, which is on the higher end of the spectrum, but we will review it following Applied’s presentation at the Citi 2026 Global TMT Conference on September 8 and the Goldman Sachs Communacopia & Technology conference the following day. As we mark those dates, we’ll also put a star on October 13 to 15 for Semicon West. For those unfamiliar with it, that event is a big one for the semi-cap industry and Applied is a prominent sponsor.

Now to answer our second question, where might we be interested in adding to AMAT shares after selling some in late June at $623.94?

Given our comments earlier this week about the growing giddiness in the market, we’re inclined to wait and see what develops in the market as we move deeper into August. As we do that, we will keep a close watch on the 100-day moving average for AMAT shares, which currently resides near $482. Should AMAT shares retreat near that level of support, we’ll look to see if a positive test is had, but we will also be mindful of the market mood and technical set up as well. We’d also give our current Two rating a re-think.

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