Lam Research, a semiconductor equipment company, has presented solid financial results and an optimistic outlook for the future. In 2024, the company’s shares have declined by 4%, underperforming the PHLX Semiconductor Sector index, which achieved a 25% gain. The company’s stock has suffered a 33% drop since reaching a 52-week high on July 11, largely due to the overall negative sentiment in the semiconductor equipment industry. This was exacerbated by the difficulties faced by industry leader ASML Holding in meeting Wall Street expectations.
Despite these challenges, positive developments in the memory market, a key revenue driver for Lam, have emerged. The company’s recent performance suggests potential for reversing its stock market struggles and embarking on a period of growth. In the fiscal first quarter of 2025, ending September 29, Lam Research reported revenue of $4.17 billion, a 20% increase from the previous year, and adjusted earnings per share of $0.86, a 25% rise year-over-year. This exceeded analysts’ expectations of $0.81 per share on revenue of $4.01 billion.
The company’s guidance further bolsters its outlook. Lam forecasts midpoint revenue of $4.3 billion for the next quarter, marking a 14% year-over-year improvement, and adjusted earnings of $0.87 per share. Analysts had anticipated earnings of $0.85 per share on revenue of $4.26 billion. CEO Timothy Archer highlighted that artificial intelligence is driving significant investments in advanced logic nodes and high bandwidth memory (HBM), a trend benefiting Lam.
Micron Technology, among others in the memory industry, is experiencing strong demand for HBM due to its efficiency and enhanced performance in AI accelerators. The market for HBM is projected to grow from $4 billion in 2023 to over $25 billion next year, prompting companies like Micron, Samsung, and SK Hynix to expand production. The increasing DRAM content in AI-enabled PCs and smartphones is also advantageous for Lam, which derives 35% of its revenue from memory manufacturing equipment.
The semiconductor market’s expansion, fueled by AI data centers and devices like smartphones and PCs, is expected to drive additional spending on fabrication equipment. The industry association SEMI anticipates $400 billion in spending on semiconductor manufacturing equipment over the next three years. Spending is projected to rise from $99 billion in 2024 to $123 billion in 2025 and $136 billion in 2026, with continued growth into 2027.
Analysts predict that Lam’s earnings could grow at a compound annual rate of 17% over the next five years, surpassing the 15% annual growth of the past five years.
Lam Research is currently trading at a price-to-earnings ratio of 23, below the Nasdaq-100 index’s average of 32. The company’s forward earnings multiple of 20 also falls short of the index’s 30. Should Lam achieve the forecasted 17% earnings growth, its earnings per share could reach $6.64 after five years, using fiscal 2024’s $3.03 per share as a base. If Lam’s stock is valued at 30 times earnings by then, similar to the Nasdaq-100’s forward multiple, its stock price could reach $199, a 165% increase from its current value. Thus, Lam Research is considered an attractive option for investors seeking AI-related stocks with a favorable valuation, especially with the promising outlook in the memory market.
