Applied Materials (AMAT.US) "achieved high scores" but was sold off. Analysts say the market finds the performance not impressive enough.

After the latest earnings announcement, Applied Materials (AMAT.US) saw its stock price drop about 5% in pre-market trading on Friday. Several analysts pointed out that this decline is due to investors having extremely high expectations for the companys Q3 fiscal 2026 performance and subsequent outlook. For the third fiscal quarter ending July 26, Applied Materials reported a 25% year-over-year revenue increase, reaching $9.12 billion; non-GAAP earnings per share rose 41% year-on-year to $3.50, with both revenue and earnings exceeding market expectations. For the fourth fiscal quarter, the company estimates revenue will be between $9.75 billion and $10.75 billion (with a midpoint of $10.25 billion), above the market consensus expectation of $9.84 billion; the non-GAAP earnings per share is expected to fall within a range of $3.82 to $4.22 (midpoint $4.02), while the general market expectation is $4.05. Additionally, Applied Materials' Chief Financial Officer Brice Hill revealed during the earnings call that the company is planning to expand manufacturing capacity. "In fact, this quarter we added over 1,500 employees in global manufacturing and AGS customer support. We are also preparing for the next phase of capacity expansion to ensure we are able to meet potentially higher demand before 2030." Furthermore, CEO Gary Dickerson stated that the ongoing demand in DRAM memory technology, logic chip foundry services, and advanced packaging will drive growth for the company. He pointed out, In the competition for leadership in AI technology, cutting-edge logic foundry, DRAM, and advanced packaging have the most significant impact on AI computing performance, energy efficiency, and cost. These areas are precisely where Applied Materials holds 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 closely collaborating with our customers to optimize yield, output, and fab ramp efficiency through services, process diagnostics and control, and capacity innovation products." Despite delivering robust performance results and an optimistic outlook for the fourth quarter, Seeking Alpha analyst Kenio Fontes noted that Applied Materials' current valuation fully reflects high expectations, offering limited margin of safety for new investors. Fontes further commented, Although this outlook exceeds market consensus, it might still disappoint some investors since expectations were already too high. Some analysts previously predicted fourth-quarter revenue could reach $10.3 billion; while the companys midpoint is $10.25 billion, many expectations were higher. Although I believe this outlook is quite reasonable, some analysts may feel that while the growth momentum is strong, it has not reached the fervency they envisioned. Ultimately, Applied Materials' valuation is not low, and it must continue to exceed expectations to support the current valuation multiples. Applied Materials and other chip equipment manufacturers, such as ASML Holding NV ADR (ASML.US), have been major beneficiaries of increasing AI infrastructure capital expenditures, but this trend also means that market expectations have already peaked ahead of financial report releases. Peer KLA Corporation (KLAC.US) faced a similar fate after releasing its earnings reportdespite exceeding fourth-quarter performance and outlook expectations, its stock price fell due to excessively high investor expectations. However, LAM Research Corporation (LRCX.US) saw its stock price surge after its quarterly report. Analysts noted that amid a surge driven by AI, chip manufacturers like Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US) have raised their capital expenditure plans, which bodes well for chip equipment manufacturers and the AI chip sector as a whole. Year-to-date, Applied Materials' stock price has risen approximately 108%, ASML Holding NV ADR and KLA have increased by about 72% each, while LAM Research's stock has surged approximately 96%. CFRA analyst Brooks Idlet stated that Applied Materials' performance and forecast, while not enough to excite Wall Street, still show overall robustness and a clear improvement in growth momentum. We believe that if the recent strength continues, there is still room for upward revisions in the market consensus for the 2027 calendar year. Morgan Stanley slightly lowered its target price from $646 to $642 while maintaining a Neutral rating. The analyst team led by Shane Brett remarked, Applied Materials performance was good but not stellarwhile we have seen several standout performances in the semiconductor equipment sector this earnings season, minor differences become significant. We summarized two key points: 1) 2026: Applied Materials' growth relative to the WFE (wafer front-end equipment) market's leading margin is lower than we previously expected. We have revised our forecast for 2026 system shipment growth from 44% to 42%, just slightly above our anticipated WFE growth rate of 37%-40%; 2) Gross Margin: We believe that semiconductor equipment gross margins reflect value in the long term, while short-term margins provide more room for active control. Analysts added that they are not particularly concerned about the companys guidance for flat gross margins quarter-over-quarter in October, as the company is clearly accelerating its capacity expansion and employee hiring to support its goal of reaching a $300 billion WFE market size by the end of this decade. However, this guidance does place Applied Materials into a category where it needs to continue to prove itself on the issue of gross margin expansion. RBC Capital Markets raised its target price from $520 to $600 while maintaining an Outperform rating. Analyst Srini Pajjuri stated, Applied Materials Q3 performance and Q4 revenue guidance both exceeded market expectations. However, its gross margin improvement is somewhat milder compared to peers, partly due to ramp-up costs and strong performance in the display business. We do not overly worry about this, as we expect gross margins to gradually expand, supported by a robust WFE environment (which we expect to last for three years), benefitting from improved shipments and pricing. Meanwhile, Jefferies maintained a Buy rating with a target price of $770. Analyst Blayne Curtis team stated, The semiconductor systems business may see growth rates exceeding 40% in the 2026 calendar year (continuing to outperform WFE), and 2027 is expected to be another year of strong growth. Customer order visibility has now extended into 2030, and Applied Materials plans to double its capacity by 2028 while also assessing further expansion opportunities for 2030. Applied Materials remains our top pick in the semiconductor equipment space due to its strong positioning in cutting-edge logic, DRAM, and advanced packaging. Citi also maintained a Buy rating with a target price of $710.