MW This analyst's top chip pick isn't flashy, but it could benefit from 'unprecedented' momentum

By Britney Nguyen

Applied Materials should benefit from upcycles in both the DRAM and leading-edge foundry industries, TD Cowen says

TD Cowen analysts named Applied Materials' stock as their "best idea" for 2026.

Applied Materials' stock was named as one analyst's "best idea" for next year, thanks to the company's exposure to two industries undergoing strong growth and the potential that analysts will boost their forecasts for the company.

About half of the semiconductor capital-equipment company's (AMAT) chip customers are exposed to dynamic random-access memory, or DRAM, and leading-edge foundry industries, TD Cowen analyst Krish Sankar said. The artificial-intelligence boom is driving demand for memory components such as DRAM, and has sparked a build-out of leading-edge foundries, which manufacture advanced chips.

The DRAM industry's typical boom-and-bust cycle "is becoming less volatile," Sankar said, noting that 2026 will be the fourth year in a row that DRAM wafer fab equipment, or WFE, experiences growth - a feat he called "unprecedented." Wafer fab equipment for manufacturing DRAM makes up about 30% of the semiconductor systems made by Applied Materials, he said.

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The TD Cowen team is modeling 17% growth for that segment, excluding China, in 2026, and they see potential for 20% upside. Sankar noted that when DRAM gross margins for suppliers such as Micron Technology $(MU)$ reached 60% in 2018, industry DRAM WFE saw growth of more than 80% before hitting a correction the following year from challenges in the macroeconomic environment.

Sankar said there could be a case where equipment for another type of memory, known as NAND, sees more growth in the next two years - but he doesn't see that in the intermediate term, since suppliers of NAND are not adding capacity. And there are "multiple greenfield projects in DRAM" under way, Sankar said, pointing to new chip-fabrication plants being built by top memory players Samsung Electronics (KR:005930), Micron and SK Hynix (KR:000660).

Investors may be wary of a 32x price-to-earnings ratio for Applied Materials, given fears that DRAM WFE could peak in 2026, Sankar said, but "investors still underappreciate the uniqueness of" the current memory cycle.

For one, the memory market is seeing demand-driven shortages due to test-time scaling, he said, which is the process of AI models using more compute power during inferencing to generate more complex and accurate answers. The rise of reasoning AI models is making "memory content a necessity not a luxury," Sankar said.

Additionally, memory-chip makers are seeing profitability "at an all-time high" due to shortages, Sankar said. Micron could see gross margins of more than 70% next year, and keep its gross margins "at healthy levels" going into 2027, he said.

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Meanwhile, the leading-edge foundry industry is in a midcycle position, and TD Cowen is modeling 15% growth next year "that is second half weighted," Sankar said.

While he said it's still too early to determine what growth will look like in 2027, conversations with industry insiders "indicate that it will be a stronger investment year."

Leading-edge foundries are currently at full capacity, Sankar said, and "multiple cleanroom projects coming online at" Taiwan Semiconductor Manufacturing Company (TW:2330), as well as a chip deal between Samsung and Tesla $(TSLA)$, will serve as tailwinds.

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Applied Materials' stock was up more than 1.1% on Thursday morning, and on track to reach an all-time closing high, according to Dow Jones Market Data.

-Britney Nguyen

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December 04, 2025 12:33 ET (17:33 GMT)

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