Applied Materials, Inc. (AMAT)

Total return at 5 years: -3.7%/year = -4.5% appreciation + 0.7% dividend. The target price ($396) is ex-dividend; the $16 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $157 · Multiples $332) is below the market price ($498).

Today — expensive, no margin of safety: at $498 trades ~49.8% above its value discounted to today (~$332); the expected return does not even reach the risk-free rate (4.5%).

At 5 years — Sobrevalorado: the expected total return is negative — the price already discounts a demanding scenario that, if not met, results in a loss.

The bridge: the return at 5 years falls below the risk-free rate (4.5%) — which is why there is not even a discount to today's value. To require a 15% annual return, it would need to be bought at ~$207.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($498) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The price discounts growth (44.4%/year) above our base case (13.0%/year) → it is priced for a demanding scenario and leaves little cushion against a slowdown.

That growth implies ~$19.6 bn of owner earnings in year 5 (vs ~$5.7 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on EV/NOPAT. In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Year 0 is the TTM to July 2026 (US$30,837 million of revenue). The normalization below was computed on the TTM to April 2026 (US$29,024 million of revenue): reported EBIT for that window (US$8,299 million) included two non-recurring charges recognized in the first half of fiscal 2026: a charge of US$253 million from the settlement with the US Department of Commerce's Bureau of Industry and Security over export controls, and US$12 million of restructuring charges from a plan approved in the fourth quarter of fiscal 2025. Both are excluded from the company's own non-GAAP results; they are added back for normalized year-0 EBIT (US$8,564 million, a 29.5% margin), which is the basis of the margin path. The TTM change in working capital is approximated by doubling the six-month change disclosed in the cash flow statement of the earnings release (−US$1,891 million in the first half of fiscal 2026, the company's own real figure), since the full fiscal 2025 annual figure is not available to replicate the standard TTM formula; this approximation is declared. TTM interest expense is estimated by annualizing the stable quarterly run rate (US$68-69 million per quarter observed in the two most recent quarters), also declared as an approximation. The year-1 growth path anchors to the guidance in the earnings release of 14 May 2026 (8-K, Item 2.02): management expects the semiconductor equipment business (the Semiconductor Systems segment, ~73% of revenue) to grow more than 30% in calendar year 2026, driven by the global build-out of artificial-intelligence computing infrastructure. That guidance is weighted with the services segment (Applied Global Services, ~23% of revenue, with more moderate historical growth) and with Corporate and Other (~4%), giving a consolidated starting growth of 21% in the base case —well above the historical trajectory of 2.5-4.4% over the last three fiscal years, but justified explicitly by the company's current guidance (§5 R1 prior), not by extrapolation. The bear case stresses year 1 by assuming the equipment business grows only half of what is guided. The base case exit multiple (21× EV/NOPAT) sits within the semis archetype band [18,25], reflecting a return on capital well above the 10% bar and a wide moat, tempered by the inherent cyclicality of semiconductor capital equipment. The company retains a fraction of real cash flow (buybacks US$2,028 million TTM, dividends US$1,515 million TTM on real FCF of US$5,623 million, to Jul 26, 2026) that is redeployed into working capital, capacity capex and bolt-on acquisitions (NEXX) rather than accumulating as cash —the cash and equivalents balance fell between October 2025 and April 2026 despite the retained flow—, so the model uses reinvestsExcess rather than accumulating cash.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $396 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $498, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $396 in 5 years plus $16 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $332. Against the current market price ($498), the margin of safety is -49.8% (trades above the maximum → a premium is paid) and the total return at that price would be -3.7% annually.

• Current entry multiple. The stock trades at 57× on NOPAT today, well above the semis archetype's exit band [18×-25×].
• Base-case exit multiple. 21× EV/NOPAT, within the archetype band, supported by the return on capital and the wide moat.
• Multiple compression over 5 years. Even with guided growth, today's entry multiple compresses to 30× in five years, still above the archetype's historical range.
• Expected return at market price. -4% annually in the base case against $498 today.
• Margin of safety. No margin of safety: the price already discounts a demanding scenario.
• Dividend yield. 0.4% yield at today's price, a modest contribution against total expected return.
• Sensitivity to the adverse scenario. Even the favorable scenario barely exceeds today's price in five years, evidence of how much future growth the current price already pays for.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✕ CFROIC backs up the ROIC (45%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Return on capital. ROIC of 29.2% on the balance sheet's real invested capital, well above the 10% bar.
• Cash generation. TTM operating cash flow ($7,993 million) comfortably covers TTM capex, though the change in working capital depresses year-0 owner earnings.
• Quality of net income. TTM net income includes material unrealized gains on strategic investments, which are neither operating nor recurring.
• Reinvestment runway. Capacity capex well above depreciation, together with deals such as NEXX, shows an active reinvestment runway in the core business.
• Recent non-recurring charges. The $253 million settlement with the U.S. Department of Commerce and restructuring charges depress reported year-0 EBIT; normalized for the valuation base.
• Non-GAAP accounting policy. The GAAP-to-non-GAAP reconciliation identifies each adjustment with its amount and cause, which makes it easier to distinguish what is recurring from what is not.
• Quarter-to-quarter consistency. Gross and operating margins expanding for four consecutive quarters, a sign of sustained operating quality.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Applied Materials' drivers combine systems volume sold by system price in Semiconductor Systems with a recurring services stream in Applied Global Services across the installed base; backlog is the leading indicator of already-contracted revenue (§5, roughly a third due beyond twelve months) and geographic concentration in China is a regulatory-risk driver, not a pure organic-growth one.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (26-jul-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Management's current guidance. More than 30% growth guided for the equipment business for calendar year 2026, well above the historical trajectory.
• Contracted backlog. $15,002 million of committed backlog at the close of fiscal year 2025, with roughly a third due beyond twelve months.
• Recent historical trajectory. Revenue growth of only 2.5-4.4% over the last three fiscal years, a marked contrast with current guidance.
• End-market diversification. Demand is spread across foundry/leading-edge logic, DRAM and NAND, without depending on a single technology node.
• Geographic concentration risk to growth. Roughly 30% of revenue comes from China, exposed to shifting export controls.
• New technology collaborations. Agreements with TSMC, SK hynix, Micron and Samsung through the EPIC Center amplify access to leading-edge customers.
• Capacity-deployment capex. TTM capex ($2,650 million) is nearly five times the year's depreciation, evidence of real investment in capacity to meet guided demand.

• Recurrence and predictability. Semiconductor manufacturing equipment will remain indispensable in 10 years; services revenue on the installed base provides partial recurrence.
• Product differentiation. The industry's broadest portfolio allows integrated solutions that a single-line competitor cannot match.
• Pricing power. Non-GAAP gross margin rose from 49.2% to 50.0% year over year in the second quarter, a sign of pricing power in the current upcycle.
• Operating leverage. Non-GAAP operating margin rose 1.4 points year over year in the second quarter alongside revenue growth, a sign of positive operating leverage.
• Behavior in recessions. Segment revenue does not separate historically more than two years back following the 2026 segment restructuring; how the business behaved in the last semiconductor-cycle recession was not identified in the sections extracted.
• Sector capital cycle. The 10-K itself warns of the entry of subsidized domestic Chinese competitors, a signal that capital continues entering the sector.
• Customer concentration. Two customers accounted for approximately 19% and 15% of net revenue in fiscal year 2025.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net cash $2.8 bn
• ✓Interest coverage (EBIT / interest)33.4x
• ✓Liquidity (current ratio)2.51×
• ✕Cash quality (CFROIC vs ROIC)CFROIC backs 45% of ROIC
• ✓Value creation (ROIC − 10% bar)+19pp
• !Malinvestment test (capex vs incremental ROIC)Capex/D&A 5.3x
• !Float / working capitalConsumes cash $3.8 bn (positive WC)
• ✓Dilution (SBC % of revenue + shares)SBC 2.3% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Net cash position. Cash and short-term equivalents ($9,233 million) exceed total debt ($6,455 million), a positive net cash position.
• Operating cash generation. TTM operating cash flow of $7,993 million, comfortably positive.
• Leverage level. Total debt of $6,455 million against equity of $23,909 million, low leverage for a capital goods business.
• Current liquidity. Current assets of $22,571 million against current liabilities of $8,998 million, a solid current ratio.
• Working capital consumption. Inventory and receivables build to meet guided demand consumed cash notably in the most recent half.
• Capex intensity. TTM capex is nearly five times the year's depreciation, an investment level in capacity that requires guided demand to materialize to be justified.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• CEO track record. Gary Dickerson has led since 2013 with nearly three decades of prior experience in the semiconductor equipment industry.
• Dividend policy. Nine consecutive years of dividend increases, the most recent one of 15%.
• Buyback discipline. Buybacks are funded with real cash flow, not additional debt, and have sustainably reduced diluted shares over the last three fiscal years.
• Ownership structure. No controlling shareholder identified; the largest holders are passive institutional managers, with no visible founder skin in the game in the register extracted.
• Candor about risks. The 10-K itself explicitly identifies the risk of domestic Chinese competition and export controls, without downplaying them.

• Record results and strong quarterly guidance, with revenue and operating margin at historic highs, sustain market enthusiasm.
• The narrative of an equipment investment supercycle driven by AI compute demand, with management guiding more than 30% growth for the equipment business for the calendar year, keeps the multiple elevated.
• Recent price moves reflect the ordinary volatility of a cyclical stock more than a genuine discount signal.

At $498 there is no clear identifiable source of discount: there is no evidence of missing buyers or a motivated seller, and the pullback from the high is explained by the normal volatility of a cyclical stock within a sustained uptrend backed by record results. Overvalued reflects that the price already embeds — and in the base case exceeds — the growth scenario guided by management itself, with no additional margin for an investor buying today.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -15%/year (-57% total): the margin of safety protects the downside. The bull (+5%/year, +27% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Export controls toward China. The U.S. government expanded export license requirements for semiconductor technology to China; no guarantee of obtaining licenses on time or at all.
• Cyclicality of AI demand. The pace of AI-linked capital investment can shift quickly and is difficult to forecast.
• Customer concentration. Two customers accounted for approximately 19% and 15% of net revenue in fiscal year 2025.
• Rare-earth mineral supply chain. China implemented export controls on rare-earth minerals used in Applied Materials' products in 2025, with risk of additional controls.
• Export-control compliance investigations. Multiple subpoenas since 2022 from U.S. authorities related to shipments to Chinese customers, with risk of additional sanctions.
• Elevated entry multiple. The current price requires the AI investment supercycle to be sustained for years to justify the multiple paid today.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 29% above the 10% bar, but the price sits above value (no margin) → great business, expensive.

• Peter Lynch Growth at a reasonable price (GARP)

  A fast grower growing 13% at a multiple/growth of 4.4 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 2% (EBIT/EV) + ROIC 29% → falls outside the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 44% vs our 13%: priced for perfection, no favorable mispricing.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -16%/yr over 5y (material loss) → risk of permanent capital loss.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: switching costs, efficient scale, intangibles, cost advantage → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  The price demands 44% growth, far above our 13% — heroic assumptions.