Strong Earnings Guidance Opens a Window for Accelerated Growth in 2027; Target Price Raised to US$670

Overview

Applied Materials' current-quarter revenue, gross margin, and EPS were broadly in line with or slightly above market expectations, but more importantly, next-quarter revenue and earnings guidance were meaningfully above consensus expectations. Goldman Sachs believes that although investor positioning and expectations were already high before earnings and the stock may weaken modestly in the near term, strong orders and an improved business mix lay the foundation for accelerated growth in the wafer fab equipment market in 2027. As spending tilts toward advanced logic, DRAM, and advanced packaging, the company's strengths in deposition, etch, and integrated solutions are expected to drive market share gains.

Core views

First, the midpoint of next-quarter revenue guidance of US$10.25 billion and EPS guidance of US$4.02 are both significantly above market expectations, indicating strong demand momentum. Second, the company plans to achieve sequential revenue growth in the January quarter, implying approximately 40% growth in the systems business, and expects the wafer fab equipment market to continue growing strongly in 2027, with the growth trend potentially extending into 2028. Third, leading-edge logic, DRAM, and advanced packaging are expected to contribute approximately 80% of incremental growth in the wafer fab equipment market, and these are precisely the areas where the company has strong market share. Fourth, gross margin is expected to improve gradually as China revenue exposure declines, shipment scale expands, and value-based pricing takes hold, though hiring of customer service engineers and rapid growth in the display business will create near-term cost pressure. Fifth, on this basis, Goldman Sachs raised its 2026–2028 EPS forecasts by an average of 14%, maintained its Buy rating, and increased its target price.

Analysis framework

The report compares current-quarter actual results against Goldman Sachs forecasts and market consensus expectations, and breaks down the growth structure by DRAM, NAND, foundry and logic, AGS, and other businesses. It then adjusts 2026–2028 earnings forecasts based on management guidance, the wafer fab equipment market cycle, end-market spending mix, product market share, and gross margin drivers. The target price is derived using a relative valuation method based on normalized EPS multiplied by a P/E multiple, with risk-reward assessed through base, bull, and bear scenarios.

Methodology notes

• Earnings AnalysisActual Results Versus Expectations Variance Analysis

  Compare the company's actual revenue, margins, EPS, and segment revenue with analyst forecasts and market consensus expectations.

  This method is used to identify the sources of earnings beats or misses. In this period, total revenue and gross margin were slightly above market expectations, NAND as well as foundry, logic, and other businesses performed strongly, while DRAM revenue was below expectations.

• Earnings ForecastBottom-Up Business Segment Forecast

  Adjust revenue, margin, and EPS forecasts based on end markets, business mix, shipment scale, pricing, and expense investment.

  Goldman Sachs incorporated wafer fab equipment market growth, advanced logic and memory investment, AGS growth, and gross margin changes to raise its 2026–2028 non-GAAP EPS forecasts by an average of 14%.

• Valuation methodsP/E Valuation Method

  Calculate the target price by multiplying normalized EPS by a target P/E multiple.

  The base case uses normalized EPS of US$21.00 and a 32x P/E multiple to derive a target price of US$670; the bull case is US$845, and the bear case is US$357.

• Factor AnalysisGoldman Sachs Factor Profile

  Compare a stock with the market and industry peers using standardized rankings across four dimensions: growth, financial returns, valuation multiples, and composite metrics.

  Growth metrics reference forward sales, EBITDA, and EPS growth; financial returns reference return on equity, return on capital, and others; valuation references P/E, P/B, and enterprise value multiples, while composite metrics consider growth, returns, and valuation simultaneously.

Asset mapping & comparison

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

• Applied Materials Inc. (AMAT.US)

  Core research subject, Buy rating maintained

  Strengths

  Has more than 60% relative exposure in deposition and etch, with strong market share in high-growth areas such as leading-edge logic, DRAM, and advanced packaging; approximately 30% of systems revenue comes from integrated solutions, and the AGS installed base continues to expand.

  Weaknesses

  Current-quarter DRAM revenue was significantly below expectations; hiring of service engineers, R&D investment, and rapid growth in the display business are pressuring near-term margins.

  Comparison

  Goldman Sachs expects the company to achieve faster growth and market share gains versus peers in 2027 due to its higher exposure to deposition and etch.

  Risks

  Further tightening of export restrictions, Chinese domestic equipment suppliers gaining more share, and valuation volatility caused by high expectations and crowded positioning.

• Lam Research Corp. (LRCX)

  Peer and earnings read-through name

  Strengths

  Also benefits from growth in advanced logic and memory capital expenditure, and has already reported earnings.

  Weaknesses

  Applied Materials' strong guidance provides limited incremental information for it.

  Comparison

  Goldman Sachs maintains a Buy rating on LRCX but expects the read-through impact of AMAT's earnings on LRCX's stock price to be broadly neutral.

  Risks

  Wafer fab equipment investment volatility, changes in memory capital expenditure, and industry competition.

• KLA Corp. (KLAC)

  Peer and earnings read-through name

  Strengths

  Has partly similar end-market exposure to AMAT and has already reported earnings.

  Weaknesses

  Its product mix and growth drivers are not fully aligned with AMAT's, and the earnings read-through is weaker than for LRCX.

  Comparison

  Goldman Sachs has a Neutral rating on KLAC and expects AMAT's results to have a smaller and more neutral impact on it.

  Risks

  Changes in the semiconductor capital expenditure cycle, valuation volatility, and end demand falling short of expectations.

Key data

• Current-quarter total revenueUS$9.115 billionUp 24.8% year over year, 0.9% above market expectations, and broadly in line with Goldman Sachs' forecast.
• Current-quarter gross margin50.4%9 basis points above Goldman Sachs' forecast and 26 basis points above market expectations.
• Current-quarter non-GAAP EPSUS$3.501.8% below Goldman Sachs' forecast and 2.3% above market expectations.
• DRAM business revenueUS$1.830 billion15.3% below Goldman Sachs' forecast and 13.0% below market expectations.
• NAND business revenueUS$493 million79.6% above Goldman Sachs' forecast and 46.7% above market expectations.
• Foundry, logic, and other systems revenueUS$4.717 billion2.6% above Goldman Sachs' forecast and 4.7% above market expectations.
• AGS revenueUS$1.781 billionBroadly in line with Goldman Sachs and market expectations; management expects this business to grow more than 20% in 2026, with a long-term mid-teens growth rate.
• Midpoint of next-quarter revenue guidanceUS$10.25 billion5.9% above Goldman Sachs' forecast and 6.1% above market expectations; implies 12.5% sequential growth and 50.7% year-over-year growth.
• Midpoint of next-quarter non-GAAP EPS guidanceUS$4.02Guidance range is US$3.82–US$4.22, 6.5% above Goldman Sachs' forecast and 7.9% above market expectations.
• Earnings forecast revision2026–2028 EPS forecasts raised by an average of 14%Mainly reflecting higher revenue and gross margin assumptions.
• 12-month target priceUS$670Raised from US$645; based on normalized EPS of US$21.00 and a 32x P/E multiple, implying 25.3% upside.

Impact & implications

In the short term, the market had already priced in strong industry expectations and positive positioning, and the company's near-term outlook may not have met the assumptions of the most optimistic investors, so the stock may still face modest pressure after earnings. Over the medium to long term, increased capital expenditure in advanced logic, DRAM, stacked memory, and advanced packaging will increase deposition and etch process intensity and improve the company's revenue mix, pricing, and market share. The services business will also provide a more stable source of growth as the installed base expands. For peers, the report expects Lam Research's stock price reaction to be relatively neutral, while the read-through impact on KLA is weaker.

Risks

• The United States or other jurisdictions may further tighten semiconductor equipment export restrictions, weakening the company's serviceable market and China revenue.
• Chinese domestic semiconductor equipment suppliers may accelerate market share gains, putting pressure on the company's sales, pricing, and long-term competitive position.
• Investor expectations and positioning are already elevated, so even with solid fundamentals, the stock may pull back in the short term if it does not meet the most optimistic expectations.
• Hiring of customer service engineers, strategic R&D investment, and an increased share of the display business may limit near-term gross margin and operating margin expansion.
• Growth in wafer fab equipment market, advanced logic, DRAM, or advanced packaging capital expenditure may fall short of expectations.
• The research institution has investment banking and other client relationships with Applied Materials, and investors should make prudent judgments in conjunction with relevant conflict-of-interest disclosures.

What to watch

• Whether January-quarter revenue can continue to grow sequentially, and whether the approximately 40% implied growth in the systems business can materialize.
• Whether growth in the wafer fab equipment market accelerates as expected in 2027 and continues into 2028.
• Whether leading-edge logic, DRAM, and advanced packaging contribute approximately 80% of the industry's incremental growth.
• Whether the deposition and etch businesses can translate into verifiable market share gains.
• Whether gross margin can improve quarter by quarter, driven by lower China revenue exposure, expanded shipment scale, and value-based pricing.
• Whether the AGS business can grow more than 20% in 2026 and maintain a long-term mid-teens growth rate.
• New export restrictions and changes in the market share of Chinese domestic suppliers.
• The impact of strategic R&D investment and customer service headcount expansion on operating expenses and margins.