After Earnings, Is Applied Materials Stock a Buy, a Sell, or Fairly Valued?

Applied Materials released its fiscal third-quarter earnings report on Aug. 13. Here’s Morningstar’s take on Applied Materials’ earnings and stock.

Key Morningstar Metrics for Applied Materials

• Fair Value Estimate
  : $520.00
• Morningstar Rating
  : ★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : High

What We Thought of Applied Materials’ Fiscal Q3 Earnings

Applied Materials’ solid fiscal third-quarter results were driven by surging AI infrastructure demand. Revenue grew 25% year on year to $9.1 billion, beating FactSet consensus estimates. Fourth-quarter guidance is for $10.25 billion in sales and $4.02 in EPS at the midpoint, ahead of our estimates.

Why it matters: The artificial intelligence-driven growth cycle for chip equipment continues to strengthen. We are impressed by the demand for leading-edge logic, DRAM, and advanced packaging, which is outpacing chip supply. We expect this to drive the majority of growth in wafer fabrication equipment for 2026-27.

• DRAM looks especially strong, with sales growing 52% year on year and management expecting an even higher step-up for the second half the year. Applied benefits from industry efforts to increase existing capacity and new fab builds.
• Applied raised its 2026 systems growth outlook above its earlier target of 30%, expecting another solid year in 2027. As this demand visibility improves, Applied is expected to bring roughly double its quarterly system output online by 2028.

The bottom line: Results and guidance reaffirmed the upside we baked into our model ahead of earnings. We maintain our $520 per share fair value estimate for wide-moat Applied Materials. After the shares slipped against high expectations ahead of the earnings release, we now view them as fairly valued.

• Positive guidance from peers and Applied indicates that industry demand remains healthy. We model close to 20% annual revenue growth through 2030, with faster growth in the next three years, driven by robust equipment demand, clean room expansions, and tight chip supply.
• We like that profitability is improving alongside growth. Non-GAAP gross margin reached 50.4%, marking its 13th consecutive quarter of year-over-year expansion. We estimate margins to rise steadily as richer mix, value-based pricing, and operating leverage kick in.
• Strong growth cycle for WFE continuing, with immense growth for AMAT. We really like AMAT’s position in chip equipment, benefitting from steep chip supply constraints that drive demand for new equipment.
• We see the stock as fairly valued post-earnings to our $520 valuation. We feel the immense growth to come over the next couple of years is adequately priced in.

The following are excerpts from Morningstar’s company report on Applied Materials stock.

Fair Value Estimate for Applied Materials

With its 3-star rating, we believe Applied Materials’ stock is fairly valued compared with our long-term fair value estimate of $520. The biggest drivers to our valuation are the growth of wafer fab equipment spending and Applied Materials’ ability to increase market share. We forecast 19% compound annual sales growth for Applied Materials through fiscal 2030. We project superb growth through 2028, driven by robust capacity expansions at both logic and memory chipmakers to supply AI demand. We expect midcycle growth to be driven by more advanced chip designs at chipmakers that rely on Applied Materials’ equipment to manufacture gate-all-around transistors, chiplet designs, and high-bandwidth memory, among other technologies.

Read more about Applied Materials’ fair value estimate.

Economic Moat Rating

We assign Applied a wide economic moat rating on the basis of intangible assets and switching costs. Applied’s proficiency in wafer fabrication equipment comes from top-notch design expertise, in our view, and we think its embedded services business and long-term customer road maps are sticky. We also believe the investment required to remain at the forefront of chip development, particularly across so many subsections of the market, creates an immense barrier to entry to all but the largest and best-capitalized chip equipment manufacturers. We expect Applied to earn returns on invested capital well above its cost of capital, more likely than not, for the next 20 years.

Read more about Applied Materials’ economic moat.

Financial Strength

We expect Applied to focus on generating strong cash flow while prioritizing research and development investment. We also expect it to remain moderately leveraged. As of October 2025, Applied held a net cash position, with $8.6 billion in cash and liquid investments compared with $6.6 billion in total debt. We like Applied’s strong balance sheet, which is supported by long-dated debt, the majority of which doesn’t come due until after 2030. Applied also has a $1.5 billion revolver it could tap into if needed.

Applied’s strong balance sheet is strengthened by robust cash flow. Over the past five fiscal years, Applied has averaged $6 billion in annual free cash flow, and we expect this number to jump over our five-year forecast to more than $8 billion as its volume grows. Both of these are close to 90% conversion of Applied’s net income.

Read more about Applied Materials’ financial strength.

Risk and Uncertainty

We assign a High Uncertainty Rating to Applied. Applied is prone to cyclicality in the semiconductor industry, with times of oversupply and lower capital expenditures followed by strong demand and more manufacturing buildouts. Results can fluctuate with semiconductor end demand, but we retain our belief that Applied can grow over the course of cycles into the long term.

Applied also faces risk from geopolitical uncertainty, primarily between the United States and China. The US government has levied export restrictions on advanced semiconductor manufacturing equipment, limiting Applied’s ability to ship to Chinese chipmakers. This impact is already digested, and Applied is largely able to compensate with demand elsewhere in the world, in our view. Still, there is risk that restrictions ramp up further and become a sales headwind.

Competitors are often more specialized than Applied. Lam Research is focused on etch and deposition, while KLA specializes in process control. Applied faces risk from battling on two fronts here, and if it is not able to adequately invest, it could find itself losing out to these strong competitors. Applied also bears risk from a concentrated customer base. If a relationship with a large manufacturer like TSMC, Samsung, or Intel were to sour, its competitive position could worsen.

We foresee little environmental, social, and governance risk for Applied Materials. Its primary risk in this domain would be losing human capital to other WFE firms. If Applied Materials isn’t able to maintain its critical engineers, it could start to see its intangible assets erode.

Read more about Applied Materials’ risk and uncertainty.

AMAT Bulls Say

• Applied is the largest WFE provider in the world, with the broadest portfolio and the largest R&D budget of its peers.
• We expect Applied to benefit from drivers of chip complexity like gate-all-around transistors and advanced packaging.
• Applied has strong profit margins and cash flow and sends most of its cash flow back to shareholders.

AMAT Bears Say

• We consider Applied to be a generalist in WFE. More-specialized firms like Lam Research and KLA could outcompete it in their respective markets.
• Applied faces cyclicality in the semiconductor market that can lead to years with lower sales and margin compression.
• Applied faces risk from geopolitical tensions between the US and China that may further inhibit its ability to ship to Chinese chipmakers.

This article was compiled by Irza Waraich.