Morgan Stanley: DRAM equipment demand outlook improves, but Applied Materials price target cut

Why is the DRAM outlook shifting?

Morgan Stanley previously expected DRAM wafer fab equipment spending growth to fall from 70% in 2026 to 33% in 2027, with growth in 2027 below that of overall equipment spending; over the same period, DRAM bit output growth was expected to rise from 32% to 38%.
Recent earnings reports show that equipment spending was slightly weaker than the bank expected, while bit output was stronger than expected. The bank is inclined to raise its 2027 equipment spending growth forecast because of the lower 2026 base, and believes bit output growth could exceed 40%.
The bank’s view is shifting toward DRAM equipment spending growth potentially outpacing overall equipment spending next year; Applied Materials is gaining share in non-EUV equipment and could therefore benefit. But Morgan Stanley remains skeptical about the durability of the DRAM cycle.

Morgan Stanley forecasts Applied Materials’ revenue for the quarter ending in January 2027 at 11.2 billion dollars, a forecast it believes may be at the high end of the expected range. The bank expects the company’s revenue in the second half of its fiscal year to grow 22% from the first half, close to Tokyo Electron’s 23%.
The bank believes that if the company’s revenue guidance for the January quarter reaches its forecast of 11.2 billion dollars, the stock could react positively and consensus earnings per share for the next 12 months could see a modest upward revision.

Component suppliers’ order books have grown significantly, but Morgan Stanley has also heard that some upstream suppliers are waiting for the outcome of price negotiations before confirming orders, making rising component costs an important issue for equipment makers.
The bank notes that equipment manufacturers have generally been able to pass on supply-chain price increases in the past, but DRAM price increases have significantly depressed gross margins at process control and test equipment makers. Applied Materials also faces near-term questions about component shortages and the readiness of DRAM customers’ cleanrooms.

Morgan Stanley maintains its Equal-weight rating on Applied Materials, but has reduced its target valuation from 22 times forecast 2028 earnings per share to 21 times, and cut its price target from 563 dollars to 538 dollars, owing to a broad contraction in US semiconductor equipment industry valuation multiples.
By the bank’s calculation, the closing price of 390.09 dollars on 30 October 2026 corresponds to 15 times its 2028 earnings per share forecast; by comparison, the trough of the previous cycle was 13 times in April 2025, when gross margin was 130 basis points lower. The bank believes the current share price reflects only a limited expectation that the equipment cycle will continue into 2028.
A more optimistic scenario depends on the company executing its plan to double supply capacity and demand matching the additional supply. Constraints on the downside include a slowdown in 2027 DRAM equipment spending, advanced logic customers scaling back expansion plans, and broad restrictions on equipment shipments and services to China.