AMAT: Future WFE Cycle And China Policy Risks Will Shape Returns

We raise our fair value estimate for Applied Materials to $248.44 from $241.69, reflecting analysts' increased price targets in the mid $200s on stronger than expected execution, slightly higher long term revenue growth and margins, and confidence that China related risks are moderating while wafer fab equipment and services demand in foundry and memory remains robust.

Analyst Commentary

Street research has turned decisively more constructive on Applied Materials, with multiple firms lifting price targets into the mid to high $200s following better than expected results and guidance. The commentary highlights both strong near term execution and improved confidence in the multiyear wafer fab equipment upcycle, while still flagging policy and demand risks that could weigh on valuations.

Bullish Takeaways

• Bullish analysts point to above consensus performance on sales, gross margin, and EPS, indicating strong operational execution that supports higher earnings power and justifies upward revisions to price targets.
• Several research notes cite sustained strength in leading edge foundry, logic, and DRAM demand, with expectations for solid wafer fab equipment growth into 2026, reinforcing a durable growth runway for core tools.
• Services and recurring sub segments are highlighted as consistent outgrowers, with upside versus consensus helping to de risk the model and underpinning a higher multiple on more stable cash flows.
• Concerns around China related headwinds are seen as increasingly de risked, with recent upside in China WFE spend and moderating fears supporting higher valuation multiples versus prior cycles.

Bearish Takeaways

• More cautious analysts maintain neutral stances despite raising targets, emphasizing that wafer fab equipment spending assumptions for 2026 have already moved higher, leaving less room for further estimate upside if the cycle underperforms.
• There is lingering concern that mature node demand, particularly tied to China, could remain volatile, which may cap near term upside to orders and limit multiple expansion despite current strength at the leading edge.
• Macro and policy risks, including evolving U.S. China semiconductor regulations and potential shifts in global manufacturing incentives, are viewed as structural overhangs that could pressure valuation if sentiment reverses.
• The stock’s recent re rating and broader market multiple expansion are flagged as contributing meaningfully to higher targets, suggesting some of the upside now reflects sentiment rather than incremental fundamental surprise.

What's in the News

• Issued new earnings guidance for the first quarter of fiscal 2026, targeting total net revenue of $6.85 billion plus or minus $500 million, signaling continued confidence in near term demand trends (Corporate Guidance).
• Recorded $41 million in goodwill and long lived asset impairment charges for the fourth quarter of 2025, up sharply from $3 million a year earlier, reflecting portfolio and asset reevaluations (Impairments/Write Offs).
• Opened the $270 million Materials to Fab Center with Arizona State University in Tempe to accelerate transfer of semiconductor innovations from research to fab prototypes and support CHIPS Act initiatives (Business Expansions).
• Introduced new semiconductor manufacturing systems targeting GAA logic, high performance DRAM and HBM, and advanced packaging with hybrid bonding to improve AI chip performance, power efficiency and cost (Product Related Announcements).
• Expanded its role in AI driven photonics and AR by launching a strategic collaboration with GlobalFoundries on waveguide fabrication in Singapore and contributing optics and process know how to improved full color AR glasses with partners JBD and RayNeo (Strategic Alliances and Client Announcements).

Valuation Changes

• The Fair Value Estimate has risen slightly to $248.44 from $241.69, incorporating modestly stronger long term assumptions.
• The Discount Rate has increased marginally to 10.57 percent from 10.54 percent, implying a slightly higher required return on equity.
• Revenue Growth has been nudged higher, with the long term annual rate now at approximately 5.92 percent versus 5.75 percent previously.
• The Net Profit Margin has edged up to about 26.59 percent from 26.54 percent, reflecting incremental operating leverage in the model.
• The Future P/E has risen modestly to 27.6x from 27.0x, indicating a small expansion in the valuation multiple applied to forward earnings.