Applied Materials Guides 30% Semiconductor Equipment Growth — So Why Is AMAT Down 27% From Peak?

Applied Materials has been benefitting from three strong and, of course, unique demand drivers. The first is rapid spending by the hyperscale companies to build AI data centers. The second driver is demand for leading edge DRAM and foundry logic production as a result of the large and growing need for AI training and inference. The third is, of course, the advanced transistor architectures, gate-all-around, that are much more complex and provide opportunities for multiple new processes.

The semiconductor industry will more than double capital investments in wafer fabrication equipment in 2026 compared to 2025. New York-based management expects that more than 80% of aforementioned growth will come from leading-edge devices produced in foundry-logic, DRAM, and advanced packaging. The company’s broad offering of deposition, etch, inspection, and materials engineering tools will help them capture this opportunity. Growth in advanced packaging will be even more pronounced, with management predicting growth in the range of 50-60% in 2026, as chipmakers adopt the chiplet-based architecture for AI systems.

Record Q2 revenue of $7.91 billion and record GAAP EPS of $3.51 and non-GAAP EPS of $2.86 for Applied Materials illustrated exponential growth of 11% year over year for the Company. The Semiconductor Systems segment reported $5.97 billion revenue with a 35.1% margin. Applied Global Services (spares, upgrades, and services) reported $1.67 billion revenue at a 29.2% margin. The increase in dividends to $0.53 per share, a 15% increase, represents the Company’s ninth annual dividend increase.

Analysts expect $9.04 billion in revenue and non-GAAP EPS of $3.36 for Q3, illustrating 23% year over year growth. This revenue expectation would surpass Q2 revenue. It would showcase growth in the AI equipment cycle. Despite strong revenue trends, there is one metric that raises a concern. For Q2, free cash flow decreased by 80% to $210 million from $1.06 billion the previous year. Investors will evaluate if free cash flow declines signal capacity constraints, or if free cash flow declines occur with elevated spending to retain capacity to meet customer demand.

AMAT has a forward P/E of 43.8x, a sharp increase from the Company’s 5 year average of 21.18. Analysts are concerned that during the initial buildout of AI data centers and near term demand saturation for artificial intelligence chips, once the hyperscalers fulfill their demand, the AI equipment cycle will stabilize. The consensus price target of $603.23 (12% upside from current prices) epitomizes the AI opportunity, yet indicates valuation caution.

Consolidation at $525.58 is what AMAT is showing as horizontal support comes in at $511.02 below and a descending trend line that puts structure to the market since the peak of July. The narrowing of range brings a decision point of evident importance. Price is finding support at a short-term moving average of $529.06 and the longer moving average of $537.42 converges with descending trendline resistance.

AMAT Price Chart - Source: Tradingview

Momentum is neutral. The RSI is at 48 and is looking at the 50 midpoint and signal line of 52 which comes in above and is showing neither buyers nor sellers have the edge. A breakout above $537.42 is the first signal of great interest as AMAT has to clear the resistance trend line and $554.94 but this would be a great indication for a bullish reversal that would put interest at $591.01 and $613.67. Should AMAT be unable to hold $511.02 it loses the interest and will test the $475.87 support.

Key Levels (Aug 12, Earnings Tomorrow)

• Immediate resistance:  $529.06 (short-term EMA)
• Trendline resistance:  $537.42 (must clear), $554.94
• Extended targets:  $591.01, $613.67 (if trendline breaks)
• Critical support:  $511.02 (horizontal pivot)
• Secondary support:  $475.87, $436.11 (July low)
• Current price:  $525.58 (consolidating below trendline)
• RSI:  48 (neutral, no momentum bias)

Important Metrics: 

(1) Did Q3 revenue meet or exceed the $9.04 billion estimate? 

(2) Did non-GAAP EPS meet or exceed the estimate of $3.36? 

(3) Did the gross margin contract or expand? 

(4) What happened to free cash flow – timing issue or structural? 

(5) How did the business segments perform? Was there an improve in the performance of the Semiconductor Systems segment? 

(6) What signal do management's Q4 and fiscal 2027 guidance give? Is management committed to achieving sustained 30%+ equipment growth? 

(7) What is the market outlook on AI cycles? Are the data center cycles and AI expected to be a 2-year phenomenon, or are customers expecting good demand over the next few years?

Applied Materials is primed for stellar year: 30%+ projected growth in semiconductor equipment, 50% in advanced packaging, with simultaneous hyperscaler AI, chipmaker capacity, and transistor complexity growth. Second quarter results hit all-time highs for revenue and margins. Tomorrow’s call should keep the momentum going.

Technically, AMAT pulled back 27% from June to $525.58, and is now consolidating below the $537.42 descending trendline. RSI is at 48, which is neutral. Consolidation will move to either $591 with healthy buying, or a decline to $475 with selling pressure.

Tactical traders should sit tight for tomorrow’s call and see if a gap is created with results and if the trend continues with a strong FY2027 guide and beat. This should move the price from $537.42 to $554-$591. Weak results or guidance could counteract and move the price to $511.02. Investors should keep in mind that a forward P/E ratio is at 43.8, which is steep even with 30% growth. The price is going to remain volatile, and lower buying levels should only be used when sustainable multi-year AI equipment cycles are proven to exist. As always, this information is for informational purposes, only.