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Investing.com -- Morgan Stanley upgraded Applied Materials (NASDAQ:AMAT) to Equal-Weight from Underweight, citing a partially derisked outlook for China and its ICAPS business, but warned that weakness in leading-edge logic and DRAM remains a concern heading into fiscal 2026.

With China and ICAPS are now derisked, and valuation is undemanding, as per the analysts.

The firm’s new price target is $158, based on 17 times its 2026 earnings estimate of $9.31, which it says is in line with Applied’s historical average but still at a steep discount to peers like KLA and Lam Research (NASDAQ:LRCX).

Morgan Stanley (NYSE:MS) sees revenue from China and ICAPS, a segment catering to mature semiconductor nodes, stabilizing through October 2025 but not recovering.

At the same time, the bank cut its forecasts for foundry logic and DRAM investments, which weigh on overall estimates. It expects Applied’s DRAM revenue to fall 5% in FY25 and 12% in FY26.

The firm’s FY26 revenue and EPS estimates are 8% and 10% below consensus, respectively. Despite the bearish tone on parts of the business, Morgan Stanley said AMAT’s current valuation and underperformance versus peers limit further downside.

Still, any renewed U.S. export restrictions on semiconductor equipment to China could hurt the stock, Morgan Stanley warned, estimating potential revenue and EPS downside of over 20% in FY26 and FY27 in such a scenario.

Upside risks include renewed investment from Intel (NASDAQ:INTC) and Samsung (KS:005930) in foundry operations, which the bank does not currently model.

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