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On Friday, Morgan Stanley (NYSE:MS) adjusted its outlook on Applied Materials (NASDAQ:AMAT) stock, reducing the price target slightly from $164.00 to $162.00, while maintaining an Underweight rating. The move comes as the firm’s analyst noted that Applied Materials’ performance did not exhibit the modest upside seen in its peers, but rather aligned closely with Morgan Stanley’s projections. According to InvestingPro data, the stock has shown significant momentum with a 12.3% return over the past week, though technical indicators suggest it may be entering overbought territory.
The analyst pointed out that despite a slight decline in China’s market exceeding expectations, the overall wafer fabrication equipment (WFE) environment is faring better than anticipated, primarily driven by demand in the DRAM sector. Applied Materials’ quarterly figures were in line with the firm’s model, with no significant surprises. The company maintains strong financial health with a current ratio of 2.46 and operates with moderate debt levels, as revealed by InvestingPro analysis.
Emerging service headwinds, particularly around 200mm investment, likely in China, were cited as the primary reason for not seeing the expected uptick in numbers that was observed in other companies. This has been identified as a key factor behind the maintained Underweight rating.
The report also highlighted that while artificial intelligence (AI) is a topic of much discussion, it is not the primary driver in the logic sector. Instead, foundry logic continues to be propelled by ICAPS and new technologies like 2 nm/gate all around. According to the analyst, Applied Materials is on track to achieve its projected 100% growth in the 2nm gate all around by CY25, which could result in $5 billion in revenue.
Despite the worst decline from peak to trough for analog and microcontroller unit (MCU) markets in a generation and significant inventory builds on producer balance sheets, spending on ICAPS (nodes greater than or equal to 10nm) remains surprisingly robust outside of China. However, the report suggests that the implied spending on the most relevant nodes for AI markets in CY25-26, which include 3 nm, 5 nm, and 7 nm, remains nearly nonexistent. With a robust gross profit margin of 48.14% and strong return on equity of 36%, Applied Materials demonstrates solid operational efficiency. Investors seeking deeper insights into Applied Materials’ financial health, valuation metrics, and growth prospects can access comprehensive analysis through InvestingPro’s detailed research reports, which include over 30 additional key metrics and expert insights.
In other recent news, Applied Materials reported its financial results for the second quarter of fiscal year 2025, achieving a record non-GAAP earnings per share (EPS) of $2.39, which surpassed the forecast of $2.31. However, revenue came in slightly below expectations at $7.1 billion, compared to the anticipated $7.12 billion. Despite the earnings beat, the company experienced a decline in its stock following the announcement. The Semiconductor Systems segment showed significant growth, with revenue rising by 7% year-over-year. Applied Materials also provided guidance for the third quarter, projecting revenue of $7.2 billion, marking a 6% increase year-over-year, and non-GAAP EPS guidance of $2.35, representing an 11% increase. Additionally, Barclays (LON:BARC) analyst Tom O’Malley updated the firm’s outlook on Applied Materials, raising the price target to $160 while maintaining an Equalweight rating. The analyst noted challenges in the China market but expressed expectations for the company to overcome these in the upcoming quarters. Applied Materials continues to focus on AI-enabling semiconductor technologies, which are seen as pivotal for future growth.
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