Rating: Buy | 12-M Price Target: $485 | Upside: +31% | Current Price: $635

Rating & Price Target

We have a Buy on Applied Materials and see the stock trading at 30.9% below our 12 month price target of $635 vs current share price of $485. Applied is one of the most diverse companies when it comes to selling semi cap equipment. They stand to benefit from AI chip spending, cloud spend, logic, hbm and additional semi manufactory build out.

There are many different aspects of Applied that are driven by cycle and long term growth. Cycle can be attributed to spending on wafer fabrication equipment, memory prices, fab utilization, china, inventory and customer spending. Long term we can look to chips getting more complex from AI, gate all around, hbm, advanced packaging, chiplets, 3d nand and capex spend per wafer increasing.

Our View: Applied is a great mix of cycle and long term growth. Our biggest concern with the stock would be a big drop in china and more export controls or memory not recovering as expected.

Company Background

Applied makes products that help customers make chips. These can include logic chips, memory chips, power chips and advanced packaged chips. Applied makes tools that allow customers to put extremely small amounts of materials on a wafer of silicon. Hence why they call themselves a materials engineering company.

Applied's main source of revenue is its semiconductor systems business. This business allows customers to deposit, etch, implant, chemically planerize, diagnose and package their wafers. Depositing will add layers of material to a wafer. Etching will take away certain materials. Chemically planarizing will level the surface of the wafer. Implanting changes the conductive properties of silicon. All of these play a major role when making advanced chips.

Applied global services or AGS. This business sells spare parts, repair and maintenance to customers. Applied can also offer upgrades to customers systems as well as subscriptions. Applied global services is beneficial to them because these machines are in customers fab for a long time. Which means they have to buy maintenance and spare parts.

Applied also has a smaller business called display and adjacent markets. They sell some display equipment to help make oled's and lcd's. Along with some newer tech that they are working on.

Applied competes with many different companies. Lam research, Tokyo electron, Asm International and KLA all compete with applied in certain areas. Lam research is a very good competitor when it comes to etch and depositing. Especially in memory. Tokyo electron is another competitor that can compete with applied in almost any area of the business. They have great relationships with their asian customers. Asm international is a leader in atomic layer deposition and KLA leads the industry in inspection. Another competitor to note is ASML. They make lithography tools that help with making advanced chips. Applied would consider ASML a complementary company since you need litho to make advanced chips.

Our View: Applied is able to sell a wide array of products to many different customers. We think this is an advantage for them. They can sell multiple products into a customers fab and hope to gain more market share as chips get more complex.

Financials

Applied had a great quarter in fiscal q3 2026. They posted record revenues of $9.12 billion which was up 25% yoy and 15% qoq. Their non gaap gross margin was 50.4% and non gaap operating margin was 34.0%. They also reported non gaap eps of $3.50.

Applied's semi systems business came in at around $7.04 billion of revenue. This was driven by customers in leading edge foundry, logic, dram and advanced packaging. Applied global services came in at about $1.78 billion. They continue to grow their installed base of tools which allows them to sell more services. Customers want to increase their uptime, buy upgrades and increase their productivity.

For fiscal q4 2026 they are guiding for about $10.25 billion of revenue and non gaap eps of $4.02. This shows continued growth in leading edge logic, dram, advanced packaging and services. China accounted for about 28% of revenue in fiscal q3. This number is still high but has decreased from last year so its less concerning to us.

Our view: We see this as a good sign that applied is seeing growth from all areas of the business. Not just china driving their numbers. Margins should continue to improve as they sell higher value products and pricing should help as well. Also they have more room to operate leveragely and services should continue to grow.

Catalysts

As mentioned earlier we think AI will be the biggest driver for applied. Chips that are made for AI require many different types of technology to make. They need more processing power, network chips, hbm, optical, power chips and more advanced packaging. All of which will require more steps in the manufacturing process. Which will allow applied to sell more products.

HBM will also be a big tailwind for applied. HBM stands for high bandwidth memory. These chips have many layers of memory and require more advanced equipment to manufacture. We think applied will see increased demand from HBM.

Another area that we think applied can benefit from is advanced packaging. Companies are starting to use chiplets to make their chips. This will require more hybrid bonding, fan out packaging and more advanced ways of computing. Applied has a variety of products that can be used in these areas.

With the migration to gate all around we expect applied to see more demand for advanced deposition, etch, metrology, bonding, thinning and materials engineering. We also think 3d nand will continue to scale and with countries building out their domestic supply chains we should see more wfe spend over the next several years.

We think over the next 12-24 months leading edge logic, dram/hbm, advanced packaging and AGS will drive applied the most. Over the next 3-5 years we see even more growth as chips get more complex from AI.

Capital Structure

Applied has a lot of cash on hand. At the end of fiscal q3 2026 they had about $14.5 billion in cash and investments. With only about $6.5 billion in total debt. They will continue to generate high amounts of free cash flow which allows them to do what they please.

Applied bought back about $860 million of stock in fiscal q3 2026. They also continue to spend money on R&D to help develop new products and technologies. We think this is important for applied to spend money on because chips are getting more complex.

Our View: We think applied has plenty of capital to return to shareholders during down cycles. And should be able to continue spending on R&D which we think will allow them to gain more market share in the future.

Price Target and Risk Factors

We believe applied should trade at a premium to its peers because we think they can continue to grow revenue at a high rate. If we see continued spending on AI related logic, hbm and advanced packaging we think applied can keep their gross margin around 50% and operating margin in the mid 30s. While also generating high amounts of free cash flow.

The biggest risks we see with applied are china and export controls. If we see less spending from china this could hurt their top line and also impact their services business. If memory doesn't recover we could see a drop in their semi systems revenue. They also have competition from lam research, tokyo electron, kla, asm international and chinese companies.

We think in our base case applied will continue to grow revenue into fiscal 2027. If we see higher spending on HBM and AI we could see applied reach our bull case of $760. If we see memory spend decrease and china restrictions increase we could see the stock fall to $365.

Our View: We think applied materials is a great way to be invested in semi cap equipment. They will always have some cyclicality to their business but we think they have enough diversity to weather the storm. With the stock at its current price we believe it is a good time to buy.