This year has been a difficult year for Lam Research. (NASDAQ:LRCX) Notably, the past few months have been even tougher for the semiconductor manufacturing equipment supplier, as its stock price fell 4% in 2024, lower than the 25% rise recorded by the PHLX Semiconductor Sector Index. Worth it.
Specifically, Lam’s stock price has fallen 33% since hitting a 52-week high on July 11th. One reason for this is the overall negative atmosphere surrounding the semiconductor equipment industry, which ASML Holding, the industry’s standard-bearer, is finding difficult. To meet Wall Street expectations.
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However, recent developments in the memory market, which accounts for a significant portion of Lam’s revenue, are positive. More importantly, the company’s latest financial results indicate that the company could reverse the stock market slump and enter a bull market. In this article, we’ll take a closer look at Lam’s last quarter performance and see why buying this semiconductor stock could be a smart choice.
Lam Research had a memorable fiscal year in 2024, with sales and profits falling due to weak demand for memory due to a downturn in the smartphone and personal computer (PC) markets. However, the company has started fiscal 2025 well.
Lam announced its financial results for the first quarter of fiscal year 2025 (three months ending September 29) on October 23. The company reported sales of $4.17 billion, an increase of 20% year over year. The company’s adjusted earnings also increased significantly, increasing 25% year-on-year to $0.86 per share. Analysts had expected Lam to post earnings of $4.01 billion and revenue of $0.81 per share.
The guidance was a bonus. Lam expects sales to be $4.3 billion at the midpoint of the quarter, an improvement of 14% from the same period last year, and adjusted earnings of $0.87 per share. Analysts would settle for earnings of $0.85 per share on sales of $4.26 billion.
Lam CEO Timothy Archer said in the latest earnings call that artificial intelligence (AI) is “driving strong investments in cutting-edge logic nodes and advanced packaging segments such as high-bandwidth memory and HBM.” “There is,” he said. Memory industry participants such as Micron Technology (NASDAQ:MU) HBM is used in AI accelerators and is expected to be in strong demand due to its power efficiency, large capacity, and improved data transfer speed.
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Micron points out that the HBM market will grow from $4 billion in 2023 to more than $25 billion next year. This is why Micron and other memory companies such as Samsung and SK Hynix are working hard to increase HBM production. According to a report by market research firm TrendForce, these three companies are expected to double their HBM production in 2025.
However, this is not the only thing that is being accelerated by the increased adoption of AI. As Micron CEO Sanjay Mehrotra pointed out, major PC manufacturers are equipping their entry-level products with at least 16 GB (gigabytes) of dynamic random access memory (DRAM) in their AI-enabled models. Midrange and premium AI PCs come with 32 GB to 64 GB of DRAM. This is a significant increase compared to the average DRAM content of 12GB seen on all PCs last year.
Similarly, AI-enabled smartphones are expected to have 50% to 100% more DRAM content compared to last year’s flagships. All of this bodes well, as Lam Research derives 35% of its revenue from selling memory manufacturing equipment. Meanwhile, the overall semiconductor market is expected to grow, driven by rising demand for AI data centers and edge devices such as smartphones and PCs, and a healthy increase in spending on manufacturing equipment.
According to industry group SEMI, an estimated $400 billion will be spent on semiconductor manufacturing equipment over the next three years. Spending on manufacturing equipment is expected to jump from an estimated $99 billion in 2024 to $123 billion next year and $136 billion in 2026. Growth is expected to continue in 2027, with spending expected to reach nearly $141 billion.
This healthy growth will be driven by investments in foundry, logic and memory equipment, the three divisions Lam Research serves. Unsurprisingly, analysts expect Lam’s profits to grow at a compound annual growth rate of 17% over the next five years, outpacing the 15% annual growth rate seen over the past five years.
Lam Research currently trades at 23 times earnings, lower than the 32 times earnings ratio of the Nasdaq 100 index, which is used as a proxy for tech stocks. Even the 20x forward earnings multiple is below the index average of 30x.
Assuming Lam Research actually grows its annual earnings by 17% over the next five years, as consensus estimates suggest, its bottom line could increase to $6.64 per share in five years (2024 (Used as a basis for fiscal year earnings per share of $3.03). And if the market decides to increase Ram’s stock’s earnings multiple due to its improved growth profile, it has a good chance of delivering impressive returns over the next five years.
Let’s say Lam is trading at a P/E ratio of 30x in five years (matching the expected price-to-earnings ratio of the Nasdaq 100 index). Its stock price could reach $199. This would be an increase of 165% from current levels. That’s why investors looking to buy AI stocks trading at attractive valuations would do well to take a closer look at Lam Research before stepping on the gas thanks to its healthy outlook for the memory market.
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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has roles in and recommends ASML and Lam Research. The Motley Fool has a disclosure policy.
1 Top Artificial Intelligence (AI) Stocks Drop 33%, Hold Out Before They Soar Originally published by The Motley Fool
