Applied Materials Inc.: A Second Consecutive Beat-and-Raise to Drive Further Re-Rating
Core Thesis
Applied Materials is positioned to deliver a second consecutive "leap" — another beat-and-raise quarter — that will force the market to re-rate the stock as the narrative shifts from "can AMAT outperform WFE?" to "by how much?" We expect JulQ revenue guidance above $8.4bn (Street at $8.1bn), a CY2026 Semi Systems growth revision from 20%+ to 25%+, and a credible path to 50%+ gross margins. Each component is independently verifiable, and together they create a compound catalyst that the current valuation does not fully reflect.
Market Mis-Pricing: Two Layers of Under-appreciation
First, the market underestimates AMAT’s ability to monetize incremental customer value. The consensus gross margin trajectory assumes a slow creep toward 50%. We see multiple levers — expedited delivery premiums, integrated power solutions, and bundled service contracts — that allow AMAT to capture pricing power beyond what the model currently embeds. The market treats gross margin as a passive function of mix; we believe it is an active variable.
Second, the market treats AMAT’s 2025 share loss as a structural issue when it is primarily a China-access problem. In CMP, the 230bps of share loss in 2025 maps almost perfectly to AMAT’s inability to serve Chinese customers. Ebara gained 410bps of share; Naura gained 100bps. Western competitors (Ulvac, KLA) did not gain meaningful share. In sputtering, the same pattern holds: Naura gained 250bps, while Ulvac and KLA barely moved. Only in CVD is there genuine competitive pressure from LAM, and we expect management to address this directly. The implication: once China restrictions stabilize, the share loss stops.
Evidence Chain
1. JulQ guidance will beat Street expectations by ~4%. LAM and TEL have set a high bar — LAM guided JunQ revenue up 13% QoQ, TEL guided JunQ/SepQ shipments up 30% H/H and 41% Y/Y — but AMAT can keep pace. Our JanQ/AprQ vs JulQ/OctQ growth forecast for AMAT broadly aligns with TEL’s 2H F3/26 vs 1H F3/27 trajectory. AMAT is set to report its first $2bn+ DRAM quarter in AprQ and guide to its first $4bn+ Foundry Logic quarter since AprQ 2023. The mix is accelerating in both directions.
2. CY2026 Semi Systems growth will be revised from 20%+ to 25%+. Peers have already revised up 2026 WFE forecasts on strengthening demand. AMAT’s customer pull-ins — particularly in DRAM, where AMAT has the highest mix among peers (31% in CY26 vs LAM 20% and KLA 28%) — provide a tangible execution path. This revision changes the baseline for CY27 estimates, which the Street has not fully adjusted.
3. Gross margin inflection is imminent. We expect management to articulate a near-term path to 50%+ and a medium-term path to 52%. The levers are: expedite fees on pull-in demand, pricing on integrated solutions (e.g., combined CVD/CMP tool flows), and power-related upsells in etch and deposition. The operating margin improvement from 30.1% in CY25 (non-GAAP) to 32.5% in CY26 is already visible in our model, but the gross margin component (48.8% → 50.0%) has more upside if pricing sticks.
4. The China share loss story is largely a China-limited story. In CMP, Ebara’s share gain in 2025 (+410bps) reflects its outsized exposure to TSMC and AMAT’s inability to access Chinese foundries. In sputtering, Naura’s gain (+250bps) is China-specific. If Ebara were to gain share again in 2026, that would signal a broader competitive issue; we don’t see that risk today. The CVD share loss to LAM (-460bps) is the one area that requires a convincing explanation, but even that is partly a function of LAM’s etch/deposition integration advantage in NAND — not a general-purpose loss.
Key Risks and Divergences
Risk #1: 2025 CVD share loss is not fully explained by China alone. LAM gained 340bps in CVD in 2025. If this reflects a genuine technology gap in dielectric deposition for leading-edge logic, it could cap AMAT’s Foundry Logic upside. We rate this risk as moderate but not yet systemic, because AMAT’s CVD portfolio covers a broader range of applications than LAM’s.
Risk #2: DRAM cycle downturn would disproportionately affect AMAT. Our quant analysis of 20 years of weekly returns shows that AMAT and MU peak and trough in the same month — there is no lead-lag. AMAT outperforms MU when DRAM ASPs are declining (0.05% weekly return vs -0.36% for MU), but underperforms in early recovery (1.03% vs 1.66%) and expansion (0.41% vs 0.81%). A rapid DRAM downturn would hit both stocks, though AMAT has more downside protection due to its diversification.
Risk #3: Widespread China equipment restrictions would reset the narrative. China accounts for 20-30% of AMAT’s revenue exposure. Barring further tightening, the steepest Y/Y decline is behind us. But any escalation — especially if it extends to services — would directly impair the gross margin and revenue trajectory we assume.
Valuation and Trading Implications
We raise our CY26 EPS estimate from $12.02 to $12.63 and CY27 from $15.43 to $16.21. Our price target moves from $432 to $454, based on 28x CY27 EPS — a 3-turn discount to LAM (31x) and a 5-turn discount to KLA (33x). This discount reflects the share loss narrative; if the JulQ print convincingly addresses it, the multiple could expand toward 30x, adding another ~$30 of upside.
The risk/reward is asymmetric. Bull case: $609 (33x CY27E $18.44). Bear case: $311 (22x CY27E $14.15). At $389, the stock offers ~17% upside to base case with ~20% downside to bear case, implying a roughly 1:1 ratio that favors the upside given the catalyst sequence.
Key monitoring points:
- JulQ Semi Systems guide absolute dollar number and QoQ growth rate
- Specific commentary on CVD share loss vs LAM
- Gross margin guidance for OctQ and CY27 trajectory
- Any update on China regulatory outlook