This has been a difficult year for Lam Research (NASDAQ: LRCX) investors as shares of the semiconductor manufacturing equipment supplier have dropped 4% in 2024, underperforming the 25% gains clocked by the PHLX Semiconductor Sector index, and it is worth noting that the past few months have been even more brutal for the company.
More specifically, Lam stock is down 33% since hitting a 52-week high on July 11. One of the reasons why that has been the case is because of the overall negativity surrounding the semiconductor equipment space, with industry bellwether ASML Holding finding it difficult to live up to Wall Street’s expectations.
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However, recent developments within the memory market, which accounts for a significant chunk of Lam’s revenue, have been positive. More importantly, the company’s latest results indicate that it could turn its poor stock market performance around and go on a bull run. In this article, we will take a closer look at Lam’s performance last quarter and check why buying this semiconductor stock could turn out to be a smart move.
Lam Research had a forgettable fiscal year 2024 as its revenue and earnings declined on account of poor memory demand, which was a result of the decline in the smartphone and personal computer (PC) markets. However, the company has started fiscal 2025 on a solid note.
Lam released its fiscal Q1 2025 results (for the three months ended Sept. 29) on Oct. 23. The company reported revenue of $4.17 billion, an increase of 20% from the prior-year period. The company’s adjusted earnings also increased an impressive 25% year over year to $0.86 per share. Analysts expected Lam to earn $0.81 per share on revenue of $4.01 billion.
The guidance was the icing on the cake. Lam expects $4.3 billion in revenue in the current quarter at the midpoint, which would be a 14% improvement over the year-ago quarter, along with adjusted earnings of $0.87 per share. Analysts would have settled for $0.85 per share in earnings on revenue of $4.26 billion.
Lam CEO Timothy Archer remarked on the latest earnings conference call that artificial intelligence (AI) is “driving strong investments in leading-edge logic nodes as well as advanced packaging segments, including high bandwidth memory or HBM.” Memory industry participants such as Micron Technology (NASDAQ: MU) have been witnessing robust demand for HBM, which is used in AI accelerators because of its power efficiency, higher capacity, and enhanced data transfer speeds.
Micron points out that the market for HBM is set to grow from $4 billion in 2023 to more than $25 billion next year. That’s the reason why Micron and other memory companies such as Samsung and SK Hynix have been busy ramping up the output of HBM. These three companies are expected to double their HBM output in 2025, as reported by market research firm TrendForce.
However, this is not the only memory type that’s getting a boost from the growing adoption of AI. As pointed out by Micron CEO Sanjay Mehrotra, leading PC manufacturers are equipping their AI-enabled models with at least 16GB (gigabytes) of dynamic random access memory (DRAM) for entry-level offerings. The mid-range and premium AI PCs are being equipped with 32GB to 64GB of DRAM. That’s a big jump compared to the average DRAM content of 12GB seen across all PCs last year.
Similarly, AI-enabled smartphones are seen carrying 50% to 100% higher DRAM content compared to last year’s flagships. All this bodes well for Lam Research as it gets 35% of its revenue from selling memory manufacturing equipment. Meanwhile, the overall growth of the semiconductor market, thanks to the growing demand for AI data centers and edge devices such as smartphones and PCs, is set to drive healthy incremental spending on fabrication equipment.
According to industry association SEMI, an estimated $400 billion is expected to be spent on semiconductor manufacturing equipment over the next three years. Fabrication equipment spending is expected to jump from an estimated $99 billion in 2024 to $123 billion next year and $136 billion in 2026. The growth is expected to continue in 2027, with spending set to reach almost $141 billion.
This healthy growth is set to be driven by investments in foundry, logic, and memory equipment, the three segments that Lam Research serves. Not surprisingly, analysts are expecting Lam’s earnings to increase at a compound annual growth rate of 17% over the next five years, exceeding the 15% annual growth it has witnessed in the past five years.
Lam Research is currently trading at 23 times trailing earnings, which is lower than the Nasdaq-100 index’s price-to-earnings ratio of 32 (using the index as a proxy for tech stocks). Even the forward earnings multiple of 20 is lower than the index’s average of 30.
Assuming Lam Research indeed clocks 17% annual earnings growth for the next five years, as consensus estimates suggest, its bottom line could increase to $6.64 per share after five years (using fiscal 2024’s earnings of $3.03 per share as the base). And if the market decides to reward Lam stock with a higher earnings multiple thanks to its improving growth profile, there is a good chance that it could deliver impressive gains over the next five years.
Let’s say Lam is trading at 30 times earnings after five years (in line with the Nasdaq-100 index’s forward earnings multiple); its stock price could hit $199. That would be a 165% increase from current levels. That’s why investors looking to buy an AI stock that’s trading at an attractive valuation would do well to take a closer look at Lam Research before it steps on the gas thanks to the healthy prospects of the memory market.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML and Lam Research. The Motley Fool has a disclosure policy.
1 Top Artificial Intelligence (AI) Stock Down 33% to Buy Hand Over Fist Before It Skyrockets was originally published by The Motley Fool
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