If you are an experienced investor or analyst, or good at what you do in investing or finance, I’m sure you will agree with this.
It is a pattern in semiconductor equipment investing where stocks tend to run ahead of the fundamentals, then wait for the fundamentals to catch up. Applied Materials is living that pattern right now, too.
On Sept. 28, Morgan Stanley cut its price target on Applied Materials (AMAT) to $563 from $642, according to a note shared with me at TheStreet.
The chip equipment maker trades around $484, which means even after the cut, the target still implies 33% upside.
Morgan Stanley is not bearish on the business. The rating stays Equal-weight. The business is making a specific argument about valuation relative to other opportunities in the sector.
Looking at performance, AMAT is up 89% year-to-date and 139% over the past year, according to Yahoo Finance.
Also Read: Applied Materials Inc. (AMAT) Latest News and Updates
What Morgan Stanley said about AMAT, and what the valuation cut means
The mechanics of Morgan Stanley’s move are worth understanding carefully because they tell you something precise.
The firm raised its 2027 revenue forecast for Applied Materials to $50.7 billion and its 2027 EPS forecast to $20.92, driven by higher NAND demand and improved gross margin assumptions.
The fundamentals went up. The price target went down. The reason? Morgan Stanley lowered the valuation multiple it applies to those improved estimates, cutting it from 26x to 22x.
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The new 22x multiple sits approximately 10% above Applied Materials’ average through-cycle multiple of 20x since 2020, according to Morgan Stanley’s note. The firm is still granting a premium, but a smaller one than before.
“The market is giving AMAT the benefit of the doubt, and we agree with that assessment,” the analysts wrote. “However, we prefer names where expectations are less reflected in the multiple.”
That last sentence is the entire thesis. The business is good, and the stock already knows it.
The record quarter that makes the valuation debate possible
Applied Materials just reported its fiscal third-quarter 2026 results in August, and the numbers help to explain why the stock has run this hard.
Record revenue of $9.12 billion grew 25% year over year (YOY)
Non-GAAP EPS of $3.50 grew 41% YOY, also a record
Non-GAAP gross margin reached 50.4%, representing the company’s 13th consecutive quarter of YOY gross margin expansion
Cash from operations was a record $3.04 billion
Distributed $860 million to shareholders through buybacks and dividends in a single quarterSource: Applied Materials Third-Quarter 2026 Results
For Q4, Applied Materials guided $10.25 billion in revenue at the midpoint. Non-GAAP EPS guidance of $4.02 at the midpoint continues the acceleration.
CEO Gary Dickerson said Applied Materials would “grow faster than the market this year” and expressed confidence in “another strong growth year in 2027.” CFO Brice Hill added that customer conversations around capacity and deployment provide visibility extending toward 2030.
Morgan Stanley’s scenario analysis adds texture to those numbers. If Applied Materials reaches approximately $14 billion in quarterly system shipments by mid-2028, consistent with its stated plan to double quarterly system output from current levels, that could imply revenue of approximately $68 billion and EPS of approximately $31.70, according to the firm’s estimates.
AMAT is up 89% year-to-date and 139% over the past year.Shutterstock
AMAT’s gross margin question shapes the long-term bull case
Morgan Stanley made one specific call that you should note. The firm said it would be “surprised” if Applied Materials outlined a path to gross margins materially above the mid-50% range.
The company’s current non-GAAP gross margin is 50.4%, while Morgan Stanley expects it to reach 52% by 2027. The gap to the “mid-50s” may look small, but reaching the high end would meaningfully change how investors model its long-term earnings power.
AMAT has been building out its manufacturing capacity aggressively — the new $500 million Singapore Tampines Campus more than doubles its advanced cleanroom capacity in the region.
Aggressive hiring and manufacturing investments are creating near-term margin headwinds that the company explicitly flagged for Q4. The 50.4% gross margin guidance for Q4 is flat sequentially because of those ramp costs.
The 11 EPIC Center R&D partnerships, including new additions with Broadcom and UC Berkeley, represent the longer-term margin opportunity.
If Applied Materials can move further up the value chain from equipment supply into co-developed chipmaking solutions, the margin ceiling rises.
Morgan Stanley says the current multiple already prices that optimistic scenario. That is a fair observation about a stock up 139% in a year. The question is whether the demand cycle extending toward 2030 gives the fundamentals enough runway to grow into the valuation.
Related: Why Citi is still backing Applied Materials after the rally