Semiconductors, or chips, are essentially the building blocks of modern technology. They are often made of silicon sliced into thin wafers and contain numerous microscopic circuits. As you can imagine, semiconductor production is a very complex process that requires state-of-the-art technology.
Lam Research (NASDAQ:LRCX) sells specialized equipment used in semiconductor manufacturing. The company’s history dates back to the 1980s, but thanks to the rise of artificial intelligence (AI), investors should be excited about its future potential.
The stock won’t make you rich overnight, but it can help you retire a millionaire as part of a diversified long-term portfolio. This is why:
The smaller the chips become, the greater the investment opportunity
The investment pitch for Lam Research comes down to the company’s important role in the semiconductor sector and where technology is trending.
Lam Research sells various products used in manufacturing, the term used to describe the semiconductor manufacturing process. As manufacturing technology improves, companies can fit more circuits on smaller chips. That’s why today’s smartphone fits in the palm of your hand, yet houses a computer that’s exponentially more powerful than a 1990 desktop computer.
Modern electronics use increasingly complex chips and need more of them. That’s led to decades of steady demand for Lam Research’s products, and that trend isn’t likely to end anytime soon.
Several emerging technologies will require highly complex semiconductors, including:
According to McKinsey & Company, companies worldwide could invest as much as $1 trillion in manufacturing by 2030! There’s an ongoing push to put more circuits on smaller pieces of silicon. Ultimately, it makes possible technology that was just science fiction a decade or two ago. I don’t know what the world will look like in twenty or thirty years, but Lam Research’s equipment will probably help build it.
Lam Research is a bona fide compounder
Lam Research is sensitive to investment cycles within the semiconductor industry. You can see how that affected annual revenue:
More important than the annual ebb and flow is that the broader trend is upward. I also like how Lam Research’s return on invested capital (ROIC) has gradually improved. It shows that the company is effectively creating value with its financial resources and can indicate a competitive position. I usually look for companies with a consistent 10% or better, and Lam Research makes that easily clear.
Consistently high returns on capital continue to snowball over years or decades and can help drive earnings growth (and investment returns). The stock has returned more than 37,938% since the mid-1980s, turning a modest $1,000 investment into more than $379,380.
The price is right to buy today
The longer you hold a stock, the more a company’s growth and ROIC will determine the stock’s return. That’s why famed investor Warren Buffett prefers investing in great companies at fair prices over average companies at cheap prices. In other words, you don’t have to split hairs with great companies like Lam Research. As long as the price is reasonable, the stock should take care of you in the long run.
Lam Research has steadily retreated from its highs since July. China is a major customer for Lam Research, and geopolitical tensions have raised concerns about its potential impact on business. In addition, there have been recent, disappointing opinions from industry peers ASML weighted on semiconductor equipment stocks. ASML warned of sluggish demand for non-AI chips.
Remember, the semiconductor industry has its ups and downs, and as long as the industry grows over time, Lam Research should do well. The good news is that these concerns have made the stock attractively priced for buyers. The stock trades at about 23 times 2024 earnings estimates, and analysts estimate the company will grow earnings at an average annual rate of 13% to 14% over the next three to five years. At 24 times earnings, shares are not a bargain for expected growth, but they are reasonable for long-term investors.
Lam Research is a blue-chip compounder ready to ride the wave of innovation in AI and other technologies. I wouldn’t be surprised if stocks continue to make investors very wealthy over the next two to three decades.
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*Stock Advisor returns October 14, 2024
Justin Pope 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.
Can Lam Research Stock Help You Retire a Millionaire? was originally published by The Motley Fool
