Applied Materials (AMAT.US) shares fell approximately 5% in pre-market trading on Friday after the company released its latest earnings report, with analysts pointing to extremely high investor expectations for the fiscal third quarter of 2026 and the subsequent outlook. For the quarter ending July 26, revenue surged 25% year-over-year to $9.12 billion, while non-GAAP earnings per share jumped 41% to $3.50, both surpassing market consensus.
For the fourth quarter, the company guided revenue between $9.75 billion and $10.75 billion, with a midpoint of $10.25 billion, exceeding the consensus estimate of $9.84 billion. Non-GAAP earnings per share are expected to range from $3.82 to $4.22, with a midpoint of $4.02, while the market had forecast $4.05. Additionally, CFO Brice Hill disclosed during the earnings call that the company is planning manufacturing capacity expansion, noting that over 1,500 employees were added globally in the quarter, and preparation is underway for the next phase of capacity expansion to meet higher demand potential by 2030.
CEO Gary Dickerson highlighted that sustained demand in DRAM memory technology, logic chip foundry, and advanced packaging will drive growth. He stated, "In the race for AI technology leadership, leading-edge logic foundry, DRAM, and advanced packaging have the greatest impact on AI computing performance, energy efficiency, and cost. These are areas where Applied Materials has strong leadership and a pipeline of next-generation innovation solutions, supporting revenue and profit growth through 2027 and beyond. We are working closely with customers to optimize yield, output, and fab ramp efficiency through services, process diagnostics, control, and capacity innovation products."
Why the muted reaction to strong results?
Despite the robust performance and optimistic fourth-quarter guidance, Seeking Alpha analyst Kenio Fontes noted that Applied Materials' current valuation already reflects high expectations, leaving limited safety margin for new investors. Fontes added, "While the outlook beats consensus, it may still disappoint some investors because prior expectations were already elevated. Some analysts had predicted fourth-quarter revenue of $10.3 billion, and the company's midpoint of $10.25 billion, though solid, fell short of those higher hopes. Ultimately, Applied Materials' valuation is not cheap, and it must consistently exceed expectations to justify its current multiple."
Applied Materials, along with other chip equipment makers like ASML (ASML.US), has been a major beneficiary of AI infrastructure capital expenditure growth, but this trend has also pushed market expectations to lofty levels before earnings releases. Peer KLA Corporation (KLAC.US) faced a similar fate after its report, with shares falling despite better-than-expected results, as investors demanded more. However, Lam Research (LRCX.US) saw its stock surge following its quarterly release. Analysts noted that amidst the AI boom, chipmakers like Taiwan Semiconductor Manufacturing Co. (TSM.US) have raised capital expenditure plans, benefiting the chip equipment sector and AI chip market overall. Year-to-date, Applied Materials shares have risen about 108%, while ASML and KLA have gained roughly 72% each, and Lam Research has climbed about 96%.
CFRA analyst Brooks Idlet commented that while Applied Materials' results and guidance may not have thrilled Wall Street, the overall performance remains solid, and growth momentum is clearly improving. "We believe that if the recent strength persists, consensus estimates for calendar 2027 could still have upside potential."
Morgan Stanley lowered its price target slightly from $646 to $642, maintaining a "Neutral" rating. Analyst Shane Brett's team noted, "Applied Materials delivered a good quarter, but not a spectacular one, and in this earnings season where several semiconductor equipment plays have shined, small differences matter. We see two key takeaways: 1) For 2026, Applied Materials' growth lead over WFE (wafer front-end equipment) is less than we expected. We cut our 2026 system shipment growth forecast from 44% to 42%, only slightly above our expected WFE growth of 37%-40%. 2) Gross margins: We believe long-term semiconductor equipment margins reflect 'value,' while short-term margins are more subject to active management." The analysts added that they are not overly concerned about the company's guidance for flat gross margins in the October quarter, as it is clearly ramping capacity and hiring to support a WFE market size target of $300 billion by the end of the decade. "However, this guidance does place Applied Materials' margin expansion story into a 'show-me' state."
RBC Capital Markets raised its price target from $520 to $600, maintaining an "Outperform" rating. Analyst Srini Pajjuri's team stated, "Applied Materials' third-quarter results and fourth-quarter revenue guidance both exceeded market expectations. However, its gross margin improvement was slightly more modest compared to peers, partially due to capacity ramp costs and a stronger contribution from the display segment. We are not overly concerned about this and expect gradual margin expansion, supported by a strong WFE environment that we anticipate lasting three years, driven by improved shipment volumes and pricing."
Meanwhile, Jefferies maintained a "Buy" rating and a $770 price target. Analyst Blayne Curtis' team commented, "Calendar 2026 semiconductor system revenue growth could exceed 40% (continuing to outpace WFE), with 2027 shaping up to be another strong year. Customer order visibility now extends to 2030, and Applied Materials plans to double capacity by 2028, while evaluating further expansion by 2030. Applied Materials remains our top pick in the semiconductor equipment space, given its strong positioning in leading-edge logic, DRAM, and advanced packaging." Citi also maintained a "Buy" rating and a $710 price target.
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