Premarket trading on Friday saw a modest uptick in Nasdaq 100 futures, rising 0.1% after Thursday's 0.81% gain in the Nasdaq Composite, which closed at 26,803.03. However, the spotlight was on Applied Materials (NASDAQ:AMAT), whose shares dropped 4.9% to $508.30 in premarket action, even though the company reported results that exceeded Wall Street expectations.
The divergence underscores a key theme in the current market: while broad enthusiasm for artificial intelligence continues to lift the tech-heavy index, individual suppliers are facing more rigorous scrutiny over their growth trajectories relative to peers. Applied Materials' decline was company-specific, not a reflection of a broader selloff in technology stocks.
Strong Quarter, Yet Investors Want More
Applied Materials delivered robust operational performance for its fiscal third quarter. Revenue surged 25% year-over-year to $9.12 billion, beating the consensus estimate of $8.99 billion. Adjusted earnings per share came in at $3.50, surpassing the $3.40 that analysts had penciled in. The company also provided an upbeat outlook for the fourth quarter, projecting revenue of $10.25 billion (midpoint) against a $9.54 billion consensus, and adjusted EPS of $4.02 versus the $3.69 expected.
Despite these numbers, investors seemed focused on comparative growth. Summit Insights Group noted that Applied's revenue expansion trailed behind ASML Holding (NASDAQ:ASML) and Lam Research (NASDAQ:LRCX). Morgan Stanley pointed out that while the unchanged margin outlook was not alarming, it kept pressure on management to deliver on its promises.
Valuation Discount Reflects Growth Concerns
Applied Materials' forward price-to-earnings ratio stands at 32.14 times projected earnings over the next 12 months, representing a 7% discount to Lam Research (34.59x) and a 13% discount to KLA (NASDAQ:KLAC) (36.85x). ASML trades at 33.39x, a 3.9% premium. This valuation gap provides some support, but also signals investor caution about Applied's ability to gain market share in a competitive environment.
The company's growth prospects are heavily tied to advanced packaging, a key technology for AI chips. Applied now expects packaging revenue to grow more than 70% in 2026, up from a previous forecast of over 50%. Chief Financial Officer Brice Hill said customer conversations are extending as far out as 2030, and he anticipates strong growth in DRAM, advanced foundry logic, and advanced packaging in the second half of the year. These orders could potentially shift the valuation discount into a period of accelerated revenue growth.
Analyst Reactions Mixed
Analyst price targets vary widely. Cantor Fitzgerald maintains an Overweight rating with a $575 target, implying 13.1% upside from Friday's premarket price. Wolfe Research has an Outperform rating and a $550 target (8.2% upside). On the other hand, Morgan Stanley's Overweight rating comes with a $502 target (-1.2%), and Argus has a Buy rating with a $500 target (-1.6%). These targets were set before Thursday's results, highlighting the divergence in expectations.
CFRA analyst Brooks Idlet described the results as strong and suggested that 2027 consensus forecasts might allow for upside if current momentum continues. The key challenge, he said, is for execution to confirm the prolonged demand signals.
Market Outlook and Economic Data
Friday brings key macroeconomic data, with July retail sales scheduled for release at 08:30 EDT. The Census Bureau characterizes this as an advance estimate, subject to revisions. A disappointing retail figure could weigh on the Nasdaq ahead of the opening bell.
For Applied Materials, risks include reduced fab investment, heightened competition, or postponed capacity expansions, which could offset gains from packaging growth. The company's stock had more than doubled in 2026, setting high expectations and leaving little room for merely solid results.
