Semiconductor equipment hits a "valuation slowdown zone"? Morgan Stanley raises Applied Materials (AMAT.US) earnings estimates but cuts price target.

Just as Meta Muse and the earlier-released GPT-6 Astra jointly reinforced market expectations for AI agent commercialization and AI computing power expansion, significantly boosting the earnings trajectory of the semiconductor equipment sector, Wall Street financial giant Morgan Stanley cut its price target on Applied Materials (AMAT.US), one of the world's largest semiconductor equipment manufacturers headquartered in the U.S., from its previous $642 to $563. Morgan Stanley began reassessing Applied Materials' valuation premium, thus lowering its price target from $642 to $563, a reduction of $79, or approximately 12.3%, while raising its 2027 revenue and earnings per share forecasts and maintaining a "Neutral/Hold" rating. The signal from this combination is clear: Morgan Stanley acknowledges the earnings growth but believes the market has already priced in a considerable portion of the positive factors, and the firm prefers semiconductor companies whose expectations are not yet fully reflected in valuations. Despite Morgan Stanley's price target cut, Applied Materials' stock remained resilient as of Monday's close, ultimately finishing up 0.36% at around $486.76. Notably, while cutting the price target, Morgan Stanley raised its 2027 revenue forecast for Applied Materials to $50.7 billion and its earnings per share forecast to $20.92. Morgan Stanley lowered the valuation multiple applied to the stock from 26x to 22x. The new valuation multiple is about 10% above Applied Materials' cross-cycle average valuation multiple of 20x since 2020. Morgan Stanley analysts said: "The market is willing to give Applied Materials the benefit of the doubt amid remaining uncertainties, and we agree with that judgment; however, we prefer companies whose expectations are not so fully reflected in valuation multiples." The firm maintained its "Neutral/Hold" rating on the stock. The financial giant expects Applied Materials' gross margin to rise from 48.8% in 2025 to 52% in 2027. The firm's analyst team added that semiconductor equipment companies' valuations are typically closely correlated with gross margins. Morgan Stanley also said it would be surprised if Applied Materials proposed a path that could push gross margins significantly and sustainably above the roughly 55% level. Applied Materials said during its quarterly earnings report for the quarter ending in July that, based on customers' long-term demand, the company plans to double its quarterly equipment systems output from current levels by 2028. Morgan Stanley's calculations show that if quarterly equipment systems shipments reach approximately $14 billion by around mid-2028, that could correspond to roughly $68 billion in revenue and $31.70 in earnings per share. Applied Materials has a presence in virtually every corner of the chip fab. Unlike ASML Holding NV ADR, which has always focused on lithography, and Lam Research, which leans more toward etching, cleaning, patterning, and critical thin-film processesconcentrated on high-aspect-ratio (HAR) etching/deposition and related process capabilities required for advanced HBM memoryApplied Materials' high-end equipment plays an important role in nearly every step of chip manufacturing. Its products cover atomic layer deposition (ALD), chemical vapor deposition (CVD), physical vapor deposition (PVD), rapid thermal processing (RTP), CMP, wafer etching, ion implantation, and other important chipmaking stages, and its business also covers high-end packaging equipment for advanced packaging/memory chip stacking. AI Demand Accelerates, Yet Price Target Cut: Applied Materials Enters a "Valuation Slowdown Zone" as Earnings Continue to Be Revised Upward The previous sharp rebound in the semiconductor sector had clear application catalysts: Muse's rapid adoption reactivated the AI FOMO trading mode, with the Philadelphia Semiconductor Index rising more than 4% on September 21, and the iShares Semiconductor ETF gaining 7.4% in the week ending September 25. From an engineering logic perspective, agents expand a single Q&A into planning, retrieval, tool invocation, code execution, and result verification. Multi-turn reasoning increases computing demand, background execution increases CPU load, and runtime state and data retention further consume memory and storage. Applied Materials' management also explicitly pointed out that agent applications require more CPU-intensive computing architectures and increase DRAM and NAND demand, providing additional growth momentum for wafer fabrication equipment. The semiconductor equipment segment benefits from both "capacity expansion demand" and "process upgrades." Advanced logic chips' gate-all-around structures, high-layer-count 3D NAND, and HBM stacking and advanced packaging have raised the technical requirements for precision deposition, selective etching, chemical mechanical polishing, and defect control. Sustained demand growth could drive both new production lines and increase upgrade demand for existing lines. Applied Materials previously disclosed at its August earnings meeting that major customers provide rolling eight-quarter demand forecasts, and the company is building capacity to double its quarterly equipment systems output from current levels by 2028; this provides a basis for long-term prosperity, but capacity-building targets must still be converted into revenue through customer procurement, equipment delivery, and acceptance. The core of Morgan Stanley's price target adjustment this time is the reduction of the target valuation multiple from 26x to 22x, a decline of about 15.4%. Even so, 22x is still 10% above Applied Materials' cross-cycle average valuation of about 20x since 2020, highlighting that Morgan Stanley still recognizes a certain growth premium. The debate centers on how large that premium should be: the firm expects the company's gross margin to rise from 48.8% in 2025 to 52% in 2027, but remains cautious about whether it can significantly break above the roughly 55% level in the future. Its core judgment is that equipment companies' valuations are closely tied to gross margins, and the room for margin improvement needs to match the valuation the market is willing to assign. In the view of Morgan Stanley's analyst team, the semiconductor equipment rally has entered a "valuation slowdown zone"even as industry demand and company profits continue to grow, stock pricing may still come under pressure as the market lowers valuation multiples. Investment judgments therefore need to simultaneously weigh order fulfillment, earnings upgrades, and the premium expectations already reflected in prices. Morgan Stanley added that the calculation of approximately $68 billion in revenue and $31.70 in earnings per share corresponding to quarterly systems shipments of $14 billion represents an optimistic growth scenario after capacity expansion is realized.