Phase Space AI

Valuation

Applied Materials [AMAT]

Applied Materials [AMAT] — Valuation

As of 2026-07-29 · framework v1.5.1 · spot $440.02 · shared comparator set: KLAC, LRCX, AMAT, ASML, TER

0. COMPANY STATE — declared first

STATE B — cyclical / commodity-sensitive.

• Test that put it there: revenue and margin driven by an exogenous cycle (WFE spend, fab utilisation, memory pricing). Ten-year operating margin spans 19.9% – 30.2% (median 27.9%), a 10.3pp range. valuation.md places LRCX in State B by name; the same test returns B for all three.
• Consequence: terminal margin must be mid-cycle-normalised on both revenue and margin, the cycle position must be dated, and the output must be trough / mid-cycle / peak earnings power rather than a trailing-peak extrapolation.
• Evidence grade: B. Twenty years of audited annuals, a full-cycle margin history, and complete segment/geographic disclosure. Held below A because the newest quarter (Q2 FY2026, ending 2026-04-26) is covered by a filed 10-Q (2026-05-21), so it does have a primary-source backstop; the grade is held at B for the cluster-level China-policy uncertainty instead.

Dating the cycle position — required, and not the same as normalising

valuation.md: "A median of annual observations over a partial window inherits that window's start point." So the window is stated explicitly. FY2021-FY2025 contains one complete WFE cycle — the FY2022 peak (30.2%), the FY2023-24 memory trough (28.9%) and FY2025 (29.2%) — a notably shallow cycle in margin terms. A median across it is a mid-cycle figure with a dated start, not an artefact of where the window happens to begin.

Where the forecast begins in the cycle: at or very near the peak. Three independent markers, none of them a forecast: 1. Backlog coverage is falling while revenue rises (see AMAT_Research.md §2). 2. China revenue share has already rolled over from its FY2024 peak. 3. The name trades at the 98th percentile of its own ten-year TTM P/E history.

1. Terminal margin — set from the company's own economics

Terminal EBIT margin: 29.2%

Basis. Own FY2021-FY2025 median operating margin (29.2%), which equals the FY2025 reported consolidated operating margin from the 10-K segment note. AMAT's operating margin has sat in a 28.9-30.2% band for five consecutive years including the FY2023-24 memory trough — the cycle normalisation and the trailing actual coincide, so NO haircut is applied.

Opex bridge. 48.7% gross - 12.6% RD&E - 6.2% SG&A - 0.6% restructuring = 29.2% EBIT, taken directly from the FY2025 10-K segment note (R83); constraint 29.2% <= 48.7% satisfied.

Hard constraint check: m_EBIT,T (29.2%) <= m_gross,T (47.3%) — satisfied, using the five-year median gross margin (47.3%) rather than the higher trailing figure (49.0%), so the constraint is tested on the more conservative of the two.

Relation to trailing actual. Trailing FY operating margin is 29.5%; terminal is 29.2%, a gap of -0.3pp. The brief requires that a terminal margin below the trailing actual be justified rather than assumed. It is not below trailing here — the five-year median and the trailing actual coincide, because the margin has been range-bound for five years including a trough. No haircut is applied and none is needed.

2. The exit multiple is not a free parameter

EV_T / EBIT_T = (1-t)(1-g/ROIC) / (WACC-g)

With t = 0.15, g = 0.04, ROIC = 0.30, WACC = 0.095:

(0.85)(1 - 0.04/0.30) / (0.095 - 0.04) = **13.4x**

Exit multiple used: 13.4x EV/EBIT. Today's traded multiple is 40.6x, so the underwritten compression is 67% (40.6x → 13.4x). Per rule 3, an exit multiple below today's is often correct and is not itself a bear assumption; the test is consistency with terminal growth, ROIC, reinvestment and cost of capital, and the identity above is what supplies it.

Reference-class validity (rule 6). The comparator set is KLAC, LRCX, AMAT, ASML, TER — a WFE oligopoly plus ASML (litho) and TER (test) as reference. It satisfies n >= 5 mature profitable firms with a matching operating model. But it carries almost no information in the dimension being matched, and that must be said rather than hidden: KLAC, LRCX and AMAT trade at 39.5x / 40.9x / 40.6x EV/EBIT across operating margins spanning 29.5% to 41.7% and growth spanning 11.4% to 16.4%. There is no slope. This is the same failure valuation.md records as "29.9x / 29.9x / 30.4x across 8pp of exit growth, no slope". A peer-median exit multiple for this cluster is therefore UNIDENTIFIED, which is precisely why the exit multiple here is derived from the identity and the peer figure is used only as a sanity check.

3. Implied-path test — the Valuation Criteria (PRIMARY long-horizon output)

reverse_dcf.py --spot 440.02 --shares 793.959 --net-cash 1786 --revenue 29024.0 --years 5 --wacc 0.095 --terminal-margin 0.292 --exit-multiple 13.4

• Solved for: revenue CAGR.
• Held fixed: terminal margin 29.2%, exit multiple 13.4x, WACC 9.5%, 5-year horizon, net cash $1,786m, 794.0m shares, TTM revenue $29,024.0m.
• EV implied by today's price: $347,567m (11.98x current revenue).

VERDICT: FAIL. The price requires 37.0% revenue CAGR for five years against 11.4% demonstrated — a 25.6pp shortfall. Per criteria.md this would be PASS WITH ARGUMENT only if the excess were backed by a specific evidenced driver. The named driver (memory/HBM capex) is real, but the company's own backlog and deferred-revenue disclosure runs the other way — coverage is falling, not building — so the argument fails on the company's own evidence, not on narrative grounds.

Sensitivity — over the exit multiple, the highest-variance parameter

Flip point: the exit multiple at which today's price only requires the demonstrated 11.4% CAGR is 37.6x — against a traded multiple of 40.6x. So the bet embedded in today's price is not that AMAT grows: it is that AMAT still trades at ~38x EV/EBIT in 2031, having compressed barely at all, five years into a cyclical business. Stating it that way is the point of the instrument.

4. Twelve-month target — separate instrument, own multiple history

Target: $397.03 (-9.8% to spot $440.02).

• NTM EPS: $15.74. Alpha Vantage EARNINGS_ESTIMATES, blended: 0.25 x FY2026 (Oct-2026) $12.2736 + 0.75 x FY2027 (Oct-2027) $16.9044. FY2027 was $14.0709 ninety days ago — a +20.1% upward revision, the largest in the cluster, with 6 up / 0 down in 30 days.
• Multiple anchor: 25.2x = the 90th percentile of AMAT's OWN ten-year monthly TTM P/E history (n=121 months, Alpaca adjusted closes x AV normalised TTM net income on the current share count). Own history, not a peer median, per valuation.md.
• Current percentile: 98th (40.7x). Own-history anchors: p50 15.4x · p75 19.6x · p90 25.2x.

Why the 90th percentile and not the median. This is the calibration judgement, made explicitly. The median (15.4x) would put the target at $242 (-45%) and would be mean-reversion by reflex — exactly the error the brief names as the most expensive recurring one in this project. The 90th percentile keeps the multiple in the top decile of the name's own range, conceding that this cycle is larger than its predecessors and that the earnings are real, while declining to underwrite the 98th percentile as a base case for a further twelve months. The whole 12-month result in this cluster is a multiple judgement, not an earnings judgement — earnings estimates are rising and that is already in the NTM figure.

Note on target-below-spot. Item B16 warns that a process whose every target sits below spot is expressing a house market view rather than valuing companies. That check is passed here on cluster construction rather than by assertion: two of the three targets come out above spot (KLAC +2.4%, LRCX +0.8%) and one below (AMAT −9.8%), from the same method and the same percentile anchor. The dispersion comes from the names' own multiple histories, which is what it should come from.

5. Trough / mid-cycle / peak earnings power (State-B required output)

On 794.0m shares, applying the name's own ten-year operating-margin markers to TTM revenue of $29,024m, at a 15% tax rate:

Note this holds revenue at the trailing level and flexes only margin, so it isolates margin cyclicality. Revenue is itself cyclical, so a true trough combines both and is worse than the top row.

6. Downside case with a named cause (Downside Criteria — MEASURED)

Named cause: China export controls plus the DRAM share slide. China is $8.53bn (30.1%) of FY2025 revenue, and AMAT is the name with the broadest exposure to Chinese trailing-edge capacity — the segment most directly in the path of further US export restrictions and of Chinese domestic-equipment substitution, which is a structural rather than cyclical loss. Note the tell already in the filings: DRAM fell from 28% to 26% of Semiconductor Systems revenue in FY2025, during the memory boom. AMAT is the least memory-levered of the three (memory ~24% of total revenue), so if foundry/logic capex digests while memory carries the cycle, AMAT participates least on the way up and still de-rates on the way down. Combine the FY2019 trough operating margin (22.9%) with a 20% revenue decline to $23.2bn and EBIT is ~$5.3bn, net income ~$4.5bn, EPS ~$5.68. At the p50 of its own ten-year multiple (15.4x) that is $88/share, −80%. At the p75 (19.6x), $111/share, −75%.

Probability: 20%. Not a going-concern case: net cash $1.79bn, investment grade. No going-concern flag.

Note on the asymmetry. AMAT has the cleanest accounting and the most stretched multiple relative to its own history (40.7x against a p90 of 25.2x — the widest gap in the cluster). Clean books do not protect a multiple.

7. Criteria summary

No position verdict is issued. The memo scores Criteria; the book decides.