Applied Materials Faces 12% DRAM Revenue Decline in 2026, Despite Strong Q2 2025 Results

Morgan Stanley analyst Shane Brett has maintained a "hold" rating for Applied Materials (AMAT.US) with a target price of $158. This cautious rating is based on a comprehensive evaluation of the outlook for Taiwan Semiconductor Manufacturing Company (TSMC) and the growth trajectory of the DRAM market. Brett anticipates that Applied Materials' DRAM business revenue is expected to decline by 12% in the fiscal year 2026. This decline is attributed to the current market conditions and the competitive landscape within the DRAM sector.

Despite the projected decline, there is a divergence in opinions among analysts regarding the company's growth potential. Some analysts remain optimistic about the company's growth potential driven by new technologies such as fully surrounded gate transistors and backside power delivery technology. These technological advancements are seen as key drivers for future growth and innovation in the semiconductor industry. The optimism stems from the belief that these technologies will enable Applied Materials to maintain its competitive edge and capture new market opportunities.

The valuation of Applied Materials is also a point of contention among analysts. Some argue that the company's semiconductor equipment business (SPE) should command a higher valuation multiple due to its strong growth prospects. Others, however, point out that the current valuation is already at a relatively high level, suggesting that there may be limited upside potential. This divergence in opinions on valuation reflects the complex nature of the semiconductor industry and the challenges in accurately assessing the future performance of companies operating within it.

In the second quarter of the 2025 fiscal year, Applied Materials delivered impressive results. The company reported revenue of $71 billion, representing a 7% year-over-year increase. All business segments performed well, with notable improvements in profitability. The gross margin increased by 170 basis points to 49.2%, marking the highest quarterly margin since the fourth quarter of 2000. Management expects revenue to remain in the range of $71.5 billion to $72.5 billion in the next quarter, indicating a slight year-over-year growth.

In conclusion, while the outlook for the DRAM market and the company's DRAM business revenue is uncertain, the potential of Applied Materials' technological advancements and strong financial performance provide a basis for optimism. The "hold" rating reflects the balanced view of the company's prospects, taking into account both the challenges and opportunities it faces in the semiconductor industry.