This has been a difficult year for Lam Research (NASDAQ:LRCX) investors, as the semiconductor equipment supplier’s shares are down 4% through 2024, underperforming the 25% gain driven by the PHLX semiconductor sector index, and it’s worth noting that the past few months have been even more brutal for the company.
More specifically, Lam stock has fallen 33% since hitting a 52-week high on July 11. One of the reasons why that is the case is because of the general negativity surrounding the semiconductor equipment space, with the industry ASML Holding finds it difficult to meet Wall Street expectations.
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However, recent developments within the memory market, which accounts for a significant portion of Lam’s turnover, have been positive. More importantly, the company’s latest results indicate it could reverse its poor stock performance and embark on a bull run. In this article, we’ll take a closer look at Lam’s performance last quarter and consider why buying this semiconductor stock could be a smart move.
Lam Research had a forgettable fiscal 2024 as sales and profits fell due to poor memory demand, which was driven by the decline in the smartphone and personal computer (PC) markets. However, the company has started the 2025 financial year well.
Lam published its first quarter 2025 results (for the three months ended September 29) on October 23. The company reported revenues of $4.17 billion, up 20% from the same period last year. The company’s adjusted earnings also rose 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 revenue of $4.3 billion in the current quarter, which would be a 14% improvement from the same quarter last year, along with adjusted earnings of $0.87 per share. Analysts would have settled for a profit of $0.85 per share on revenue of $4.26 billion.
Lam CEO Timothy Archer noted during the latest earnings conference call that artificial intelligence (AI) is “driving strong investments in leading logic nodes and advanced packaging segments, including high-bandwidth memory or HBM.” Memory industry participants such as Micron technology (NASDAQ:MU) have witnessed robust demand for HBM, which is used in AI accelerators due to its energy efficiency, higher capacity and improved data transfer speeds.
Micron points out that the market for HBM will grow from $4 billion in 2023 to more than $25 billion next year. That’s why Micron and other memory companies like Samsung and SK Hynix have been busy ramping up HBM’s output. These three companies are expected to double their HBM production by 2025, according to market research firm TrendForce.
However, this isn’t the only memory type getting a boost from the growing adoption of AI. As Micron CEO Sanjay Mehrotra has noted, leading PC manufacturers are equipping their AI-enabled models with at least 16 GB (gigabytes) of dynamic random-access memory (DRAM) for entry-level offerings. The mid-range and premium AI PCs will be equipped with 32 GB to 64 GB of DRAM. That’s a big jump from the average 12GB DRAM content seen on all PCs last year.
Similarly, AI-enabled smartphones are seen with 50% to 100% higher DRAM content compared to last year’s flagships. All of this bodes well for Lam Research, as it gets 35% of its revenue from sales of memory manufacturing equipment. Meanwhile, the overall growth of the semiconductor market, thanks to growing demand for AI data centers and edge devices such as smartphones and PCs, will drive healthy incremental spending on manufacturing equipment.
An estimated $400 billion is expected to be spent on semiconductor manufacturing equipment over the next three years, according to industry association SEMI. Spending on manufacturing equipment is expected to rise from an estimated $99 billion in 2024 to $123 billion next year and $136 billion in 2026. Growth is expected to continue into 2027, with spending expected to reach nearly $141 billion .
This healthy growth is likely to be driven by investments in foundry, logic and memory equipment, the three segments that Lam Research serves. Not surprisingly, analysts expect Lam’s profits to rise at a compound annual growth rate of 17% over the next five years, surpassing the 15% annual growth rate of the past five years.
Lam Research currently trades at 23 times trailing earnings, which is lower than the Nasdaq-100 the index’s price-to-earnings ratio of 32 (using the index as a benchmark for technology stocks). Even the forward earnings multiple of 20 is lower than the index average of 30.
Assuming Lam Research does indeed post 17% annual earnings growth over the next five years, as consensus estimates suggest, operating income could rise to $6.64 per share after five years (with fiscal 2024 earnings of $3.03 per share as a basis). And if the market decides to reward Lam stock with a higher earnings multiple thanks to its improving growth profile, chances are it can post impressive gains over the next five years.
Let’s say that after five years Lam is trading at 30 times earnings (in line with the forward earnings multiple of the Nasdaq-100 index); the stock price could reach $199. That would be an increase of 165% from current levels. That’s why investors looking to buy an AI stock trading at an attractive valuation would do well to take a closer look at Lam Research before stepping on the gas, thanks to the memory market’s healthy prospects.
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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) Stocks Fall 33% to Buy Hand Over Fist Before It Skyrockets was originally published by The Motley Fool
