Morgan Stanley raises Applied Materials rating, sees another 10% upside

Morgan Stanley upgraded Applied Materials (AMAT) to Overweight from Equal-weight, citing increased confidence in the semiconductor Wafer Fab Equipment market, driven by improved memory pricing trends and upside risk to 2026/2027 memory capex expectations. The firm raised its 12-month price target by 22% to $209, implying 10% upside from Friday's close, and highlighted AMAT's significant 25% valuation discount to rival Lam Research, suggesting a favorable risk-reward profile given its leverage to greenfield DRAM and derisked segments.

Analysis

Morgan Stanley has upgraded Applied Materials (AMAT) to Overweight from Equal-weight, signaling increased confidence in the semiconductor Wafer Fab Equipment (WFE) market. The upgrade is underpinned by recent improvements in memory pricing trends and the view that memory capital expenditure expectations for 2026-2027 have an upward skew. Concurrent with the rating change, the firm increased its 12-month price target on AMAT by nearly 22% to $209, implying a 10% upside from its previous close of $190.10. A key component of the bull case is valuation; AMAT is currently trading at a 25% discount to its peer Lam Research, substantially wider than the 10% average discount observed since 2023. Morgan Stanley's new target implies this valuation gap will narrow to a 15% discount. The bank also views AMAT's risk-reward profile as highly favorable, citing a 3:1 bull-to-bear skew, and highlights the company's strong leverage to greenfield DRAM and the perception that its China, ICAPS, and leading-edge logic segments are now de-risked.

Key Decisions for Investors

• Given the positive catalysts and a favorable 3:1 bull-to-bear risk skew, investors may consider initiating or adding to long positions in Applied Materials to gain exposure to the strengthening memory cycle.
• The 25% valuation discount to competitor Lam Research presents a clear relative value argument; investors focused on the WFE space could favor AMAT over LRCX, anticipating a narrowing of this historically wide gap.
• The investment thesis is contingent on future memory capital expenditures, so investors should closely monitor industry data on memory pricing and capex guidance to validate the 2026/2027 outlook cited in the upgrade.