DRAM upcycle lifts earnings expectations, with earnings focus shifting to guidance, gross margin, and 2027 sustainability

Overview

This report focuses on three core debates ahead of Applied Materials' earnings: whether OctQ shipments and revenue guidance can follow the strong performance of LAM and TEL, whether management can outline a path for long-term gross margin to improve toward the mid-50% range, and the scale and sustainability of DRAM wafer fab equipment spending in 2027. Morgan Stanley recognizes the significant upside driven by DRAM demand and sharply raises its earnings forecasts, but believes more than 30% quarter-over-quarter OctQ shipment growth should be viewed as a bull-case scenario rather than a base-case threshold.

Core views

Applied Materials has delivered stronger growth than LAM since JanQ, with OctQ and JanQ system shipments expected to grow 20% and 9% quarter-over-quarter, respectively, corresponding to 44% growth for CY26. The company has relatively high DRAM exposure and is therefore an important beneficiary of DRAM capacity expansion; however, if DRAM growth slows in 2027, or if China and mature-node businesses offset growth, its relative valuation discount may be difficult to narrow quickly. Long-term gross margin has room to improve, but the base-case model does not yet assume an immediate step-up.

Analysis framework

The report combines an earnings preview, peer guidance comparison, wafer fab equipment spending scenario analysis, financial forecast revisions, and relative P/E valuation to assess Applied Materials' near-term guidance, long-term margin profile, and sensitivity to the DRAM cycle, while setting bull, base, and bear risk-reward scenarios.

Methodology notes

• Financial forecastingMorgan Stanley ModelWare

  Builds company earnings forecasts based on assumptions for quarterly shipments, revenue, gross margin, and EPS.

  The report uses Morgan Stanley's internal model to update CY26 to CY28 revenue, system shipments, gross margin, and EPS, and compares them with consensus expectations and historical data.

• Relative valuationP/E valuation method

  Derives the target price by multiplying forward EPS by the target P/E multiple, with reference to LAM's valuation level.

  The base case applies approximately 27x CY28 EPS of $23.94 and assigns a valuation discount of about 1x relative to LAM, resulting in a $646 target price.

• Scenario analysisRisk-reward scenario analysis

  Calculates different target prices based on changes in DRAM spending, revenue growth, gross margin, and valuation multiples.

  The bull, base, and bear scenario target prices are $894, $646, and $421, respectively, to reflect the impact of changes in the DRAM cycle, market share, and profitability.

• Peer comparisonComparable company analysis

  Compares Applied Materials with LAM, TEL, and KLA in terms of shipment growth, DRAM exposure, and valuation.

  The report uses peer quarterly guidance to assess a reasonable growth threshold for Applied Materials and evaluates whether its valuation discount has conditions to narrow.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Applied Materials Inc. (AMAT.US)

  Core covered company in the report and beneficiary of DRAM capital spending

  Strengths

  CY26 system shipments are expected to grow 44%; DRAM accounts for a relatively high share of the business; GAA and backside power delivery architectures in advanced logic create growth opportunities; long-term gross margin has improvement potential.

  Weaknesses

  There are concerns about share loss in the China market and the foundry logic segment, and the near-term valuation discount may persist.

  Comparison

  Applied Materials' recent growth has been faster than LAM's. Its CY26 DRAM business share is about 31%, higher than LAM's 24% and slightly higher than KLA's 30%; however, its base-case valuation remains about 1x P/E lower than LAM's.

  Risks

  A weakening DRAM investment cycle, expanded restrictions on equipment and services to China, share loss at key customers such as Samsung or TSMC, and gross margin improvement falling short of expectations.

• Lam Research Corp

  Key comparable company and valuation reference

  Strengths

  SepQ revenue is expected to grow 21% quarter-over-quarter, system shipments are expected to grow 32%, and the company has outlined a path for gross margin to improve toward the mid-50% range.

  Weaknesses

  Its DRAM business share is lower than Applied Materials', and the margin benefits from shifting manufacturing to Malaysia still need to be realized.

  Comparison

  Applied Materials' target valuation is about 1x P/E lower than LAM's; LAM's strong guidance serves as a peer reference ahead of earnings, but should not directly become the base-case threshold for Applied Materials' OctQ.

  Risks

  Manufacturing migration execution, industry cycle, and customer capital spending volatility.

• Tokyo Electron (TEL)

  Semiconductor equipment peer and quarterly shipment guidance reference

  Strengths

  SepQ system shipment guidance indicates 33% growth, and the company believes DRAM may become the fastest-growing end market in 2027.

  Weaknesses

  The report does not provide sufficient evidence to assess its specific financial weaknesses.

  Comparison

  TEL's and LAM's strong guidance together raise market expectations for Applied Materials' earnings, but Morgan Stanley still views more than 30% quarter-over-quarter OctQ shipment growth for Applied Materials as a bull-case scenario.

  Risks

  Industry demand, sustainability of DRAM investment, and execution risks.

Key data

• Target price$646.00Slightly lowered from $647.00, mainly because the CY28 target P/E was reduced from 30x to 27x.
• Current share price$546.62As of the close on August 4, 2026.
• Implied upsideApproximately 18.2%Calculated based on the target price and the closing price listed in the report.
• OctQ revenue expectationMore than $10.5bnMorgan Stanley forecasts $10.5bn, versus consensus expectations of $9.5bn.
• CY26 revenue and EPS forecast$38.7bn/$14.60Prior forecasts were $36.9bn and $13.93, respectively.
• CY27 revenue and EPS forecast$50.5bn/$20.26Prior forecasts were $46.2bn and $18.41, respectively.
• System shipment growth forecast44% in CY26, 35% in CY27Prior forecasts were 37% and 28%, respectively.
• Base-case CY28 gross margin51.9%The bull case is 52.4%, and the bear case is 51.2%.
• Risk-reward target pricesBull $894/base $646/bear $421Corresponding respectively to stronger DRAM demand and margin expansion, base-case growth, and weakening DRAM and advanced logic demand.
• Key DRAM spending scenarioMore than $75bn in 2027, more than $100bn in 2028If achieved and the market smoothly absorbs roughly 40% bit supply growth, Applied Materials will be in a very favorable position.

Impact & implications

In the near term, OctQ revenue guidance above consensus expectations and an upward revision to the semiconductor systems growth outlook may strengthen the market's expectations for Applied Materials earnings upgrades. Over the medium to long term, further share-price re-rating depends on whether DRAM equipment investment can continue into 2027 to 2028, whether gross margin can steadily move toward the mid-50% range, and whether the company can maintain its market share in the foundry logic segment. Even with earnings forecasts raised, the lower valuation multiple still limits the increase in the target price.

Risks

• 2027 DRAM wafer fab equipment spending falls below $75bn, or visibility is lacking for further growth to more than $100bn in 2028.
• The market cannot smoothly absorb roughly 40% additional DRAM bit supply growth, leading to supply-demand imbalance and cuts to equipment investment.
• Restrictions on China-related equipment shipments and services expand further.
• Applied Materials loses market share at key customers such as Samsung and TSMC.
• Foundries reduce advanced logic capacity expansion plans, weakening opportunities related to GAA and backside power delivery.
• Gross margin improvement is slower than expected and cannot converge toward the mid-50% range.
• DRAM growth slows in 2027, while China and mature-node businesses become a drag.
• The valuation discount persists, preventing earnings upgrades from being fully translated into share-price re-rating.

What to watch

• Whether OctQ revenue guidance can reach or exceed $10.5bn.
• Whether OctQ system shipments grow close to the base-case forecast of 20% quarter-over-quarter, or enter the bull-case range of more than 30%.
• Whether the company raises its existing guidance for more than 30% CY26 semiconductor systems growth.
• Whether management outlines a clear path for gross margin to move toward the mid-50% range by the end of this decade.
• Whether 2027 DRAM wafer fab equipment spending could reach $70bn to more than $75bn.
• Whether DRAM equipment investment can further reach more than $100bn in 2028.
• Whether the market can absorb roughly 40% DRAM bit supply growth without significant price or inventory disruptions.
• Changes in Applied Materials' market share in China, ICAPS, advanced logic, and key customers.