Applied Materials (AMAT.US) Scores High but Faces Selloff; Analysts: Market Unimpressed by Earnings

According to Zhitong Finance APP, following the latest earnings release, Applied Materials (AMAT.US) shares fell about 5% in U.S. pre-market trading on Friday. Multiple analysts attributed this to investor expectations for the company’s Q3 FY2026 results and subsequent outlook having reached extremely high levels.

In the third fiscal quarter ending July 26, Applied Materials' revenue grew 25% year-over-year to $9.12 billion; non-GAAP earnings per share rose 41% year-over-year to $3.50, with both revenue and profit exceeding market expectations. For the fourth fiscal quarter, the company expects revenue in the range of $9.75 billion to $10.75 billion (midpoint $10.25 billion), higher than the consensus estimate of $9.84 billion; non-GAAP EPS is expected in the range of $3.82 to $4.22 (midpoint $4.02), while the typical market forecast is $4.05.

Additionally, CFO Brice Hill revealed on the earnings call that the company is planning to expand manufacturing capacity. “In fact, this quarter we added over 1,500 employees globally to our manufacturing and AGS customer support divisions. We are also preparing for the next stage of capacity expansion to ensure we are able to meet potentially higher demand before 2030.”

Furthermore, CEO Gary Dickerson stated that ongoing demand in the DRAM storage technology, logic chip foundry, and advanced packaging sectors will drive the company’s growth.

He noted: “In the competition for AI technology leadership, cutting-edge logic foundries, DRAM, and advanced packaging have the greatest impact on AI computing performance, energy efficiency, and costs. These are the areas where Applied Materials has a strong leadership position and a reserve of next-generation innovative solutions, which will support revenue and profit growth in 2027 and beyond. We are working closely with customers to optimize yield, output, and fab ramp-up efficiency through services, process diagnostics and control, and capacity innovation products.”

Despite robust performance and an optimistic Q4 outlook, Seeking Alpha analyst Kenio Fontes pointed out that Applied Materials’ current valuation already fully reflects high expectations, leaving limited margin of safety for new investors.

Fontes further said, “This outlook is above market consensus, but may still disappoint some investors since expectations were already extremely high. Some analysts previously forecasted Q4 revenue could reach $10.3 billion. While the company’s midpoint is $10.25 billion, some estimates were even higher. While I believe this outlook is quite reasonable, some analysts may think the growth momentum, though good, is not as explosive as they imagined. Ultimately, Applied Materials’ valuation is not low, and it must continue to beat estimates to support current multiples.”

Applied Materials and other chip equipment makers (such as ASML.US) have been major beneficiaries of increased AI infrastructure capex, but this trend also means market expectations have been pushed higher ahead of earnings reports.

Peer KLA (KLAC.US) suffered a similar fate after releasing results—despite Q4 performance and outlook beating expectations, its shares still fell due to excessive investor expectations. However, Lam Research (LRCX.US) saw its stock price surge after quarterly results. Analysts pointed out that driven by the AI boom, chipmakers like TSMC (TSM.US) have raised capex plans, which is positive for chip equipment manufacturers and the AI chip sector as a whole. Year-to-date, Applied Materials’ share price is up about 108%, ASML and KLA are up around 72%, and Lam Research about 96%.

CFRA analyst Brooks Idlet said that while Applied Materials’ results and forecasts may not excite Wall Street, overall performance remains robust with clear improvement in growth momentum. “We believe that if recent strength continues, there is still room for upward revisions to consensus expectations for calendar 2027.”

Morgan Stanley slightly lowered its price target from $646 to $642, maintaining an “Equal-weight” rating.

The analyst team led by Shane Brett noted: “Applied Materials’ results were good, but not spectacular—and in this earnings season, we have seen several semiconductor equipment names deliver stellar performances, making subtle differences important. We summarize two key points: 1) 2026: Applied Materials’ growth leadership relative to the WFE (Wafer Front End) market is less than we previously expected. We lowered our 2026 system shipment growth forecast from 44% to 42%, only slightly above our expected WFE growth of 37%-40%; 2) Gross Margin: We believe long-term, semiconductor equipment gross margins reflect ‘value,’ while short-term margins have more leeway for active management.”

Analysts added that they are not particularly concerned about the company’s guidance for flat gross margins quarter-over-quarter in the October period, since the company is clearly accelerating capacity expansion and hiring to support WFE market size reaching $300 billion by the end of the decade. “However, this guidance does place Applied Materials in the ‘needs to continuously prove itself’ category on the gross margin expansion front.”

RBC Capital Markets raised its price target from $520 to $600 and maintained an “Outperform” rating. The analyst team led by Srini Pajjuri stated: “Applied Materials’ Q3 results and Q4 revenue guidance both exceeded market expectations. However, gross margin improvement was somewhat modest relative to peers, partly due to capacity ramp-up costs and a strong display business segment. We are not overly concerned about this, and expect that supported by a strong WFE environment (which we expect to last for three years), aided by volume and pricing improvement, gross margins will gradually expand.”

Meanwhile, Jefferies maintained a “Buy” rating and a $770 price target. The analyst team led by Blayne Curtis commented: “Semiconductor systems business could see growth above 40% in calendar 2026 (continuing to outperform WFE), and 2027 could be another strong growth year. Customer order visibility now extends to 2030, and Applied Materials plans to double capacity by 2028, with further expansion assessed for 2030. Applied Materials remains our top pick in semiconductor equipment due to its strong positions in leading-edge logic, DRAM, and advanced packaging.”

Citi also maintained a “Buy” rating and a $710 price target.