Are semiconductor equipment stocks facing a "valuation slowdown"? Morgan Stanley raises Applied Materials (AMAT.US) earnings forecast but cuts target price

According to reports from Zhitong Finance APP, while Meta Muse and the earlier released GPT-6 Astra have both significantly strengthened market expectations for the commercialization of AI agents and AI computing power expansion—thereby notably boosting the profit trajectory of the semiconductor equipment sector—Wall Street financial giant Morgan Stanley has lowered its price target for Applied Materials (AMAT.US), one of the world’s largest semiconductor equipment manufacturers headquartered in the United States, from its previous $642 to $563.

Morgan Stanley has started to re-examine the valuation premium of Applied Materials, thus reducing its price target from $642 to $563—a cut of $79, or approximately 12.3%. At the same time, it has raised forecasts for 2027 revenue and earnings per share, while maintaining a “Neutral/Hold” rating. The signal from these moves is clear: Morgan Stanley acknowledges profit growth but believes that much of the optimism has already been priced in by the market. The firm prefers semiconductor companies whose valuations have not yet fully reflected positive expectations.

Despite the target price cut, Applied Materials’ stock price remained resilient, ending Monday’s session up 0.36% near $486.76. Notably, while lowering 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 shifted the valuation multiple applied to the stock from 26x to 22x. The new multiple is about 10% higher than the approximately 20x cross-cycle average multiple for Applied Materials since 2020.

Morgan Stanley analysts stated: “The market is willing to give Applied Materials the benefit of the doubt despite some uncertainties, and we agree with that; however, we prefer companies whose expectations are not so fully reflected in valuation multiples.” The institution maintains 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 analyst team added that the valuations for semiconductor equipment companies are usually closely tied to gross margin.

Morgan Stanley also commented that it would be surprised if Applied Materials could outline a path whereby gross margins would significantly and long-term exceed around 55%.

In its quarterly earnings report concluded in July, Applied Materials stated that, based on customer long-term demand, the company plans to double quarterly equipment system output from current levels by 2028. According to Morgan Stanley’s calculations, if quarterly system shipments approach $14 billion around mid-2028, this could correspond to about $68 billion in revenue and $31.70 in earnings per share.

Applied Materials is ubiquitous in chip factories. Unlike ASML, which remains focused on lithography, and Lam Research, which concentrates on etch, cleaning, patterning, and critical thin film processes—mainly in high aspect ratio (HAR) etch/deposition and related capabilities required for advanced HBM memory—Applied Materials’ high-end equipment plays a vital role in nearly every step of semiconductor 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 critical chipmaking steps. Its business also includes advanced packaging equipment for cutting-edge packaging/storage chip stacking.

AI Demand Accelerates, Yet Target Price Is Lowered: As Profits Continue to Be Revised Upward, Applied Materials Enters a “Valuation Deceleration Zone”

The previous substantial rebound in the semiconductor sector had clear application catalysts: the rapid spread of Muse reignited the AI FOMO trading model, pushing the Philadelphia Semiconductor Index up more than 4% on September 21 and driving the iShares Semiconductor ETF up 7.4% in the week ending September 25. From an engineering perspective, AI agents extend a single Q&A into planning, retrieval, tool invocation, code execution, and results verification, with multi-round reasoning increasing computational demand. Backend execution raises CPU loads, and the retention of running states and data further consumes memory and storage. Management at Applied Materials has also pointed out that agent applications require more CPU-intensive architectures and boost DRAM and NAND demand, providing additional growth drivers for wafer fabrication equipment.

The semiconductor equipment sector is thus benefiting from both “capacity expansion demand” and “process technology upgrades.” All-around gate structures for advanced logic chips, high-layer-count 3D NAND, HBM stacking, and advanced packaging have raised technical requirements for precision deposition, selective etch, chemical mechanical polishing, and defect control. Persistent demand growth can spur both new production lines and upgrades to existing lines.

At its August earnings meeting, Applied Materials disclosed that major clients provide eight-quarter rolling demand forecasts, and the company is building out the capacity to double quarterly system output by 2028. This supports buoyant long-term prospects, but meeting capacity targets still depends on customer purchases, equipment delivery, and acceptance converting into revenue.

The core of Morgan Stanley’s target price adjustment is the reduction of the valuation multiple from 26x to 22x, translating to a cut of about 15.4%. Even so, 22x is still 10% above the approximate 20x cross-cycle average since 2020, highlighting that Morgan Stanley still recognizes some growth premium. The debate centers on how large this premium should be: the firm forecasts gross margin will rise from 48.8% in 2025 to 52% in 2027 but remains cautious about any significant breakthrough above approximately 55%. Their key assessment is that equipment company valuations are closely tied to gross margin, and room for margin improvement needs to be matched with the valuations accorded by the market.

In the eyes of Morgan Stanley’s analyst team, the semiconductor equipment cycle is in a "valuation deceleration zone"—even as industry demand and company profits continue to grow, stock prices may come under pressure as the market reduces valuation multiples. Investment decisions therefore need to balance order fulfillment, earnings upgrades, and premiums already reflected in current prices. Morgan Stanley added that its calculation based on quarterly system shipments reaching $14 billion—corresponding to about $68 billion in revenue and $31.70 in earnings per share—represents an optimistic growth scenario following the realization of expanded capacity.