As artificial intelligence (AI) continues to shape the future of technology, Lam Research has emerged as a key player in the industry’s development. While the company’s stock (NASDAQ: LRCX) has more than doubled since early 2023, it remains an under-followed gem with tremendous growth potential in the coming years. Here’s a closer look at why Lam Research is a major force in AI.
Riding the AI Wave
Lam Research, a provider of advanced chip manufacturing equipment, finds itself in a unique position in the AI space. While traditional semiconductor companies like Nvidia are well known for their GPUs, Lam has carved out a niche providing the essential machinery required for fabricating chips that power AI systems. Despite the downturn in the semiconductor market segment that Lam belongs to, the company has thrived due to governments’ growing interest in incentivizing domestic chip production and the escalating performance demands from AI systems.
A Closer Look at Lam’s Performance
In its March 2024 financial report, Lam Research’s revenue showed a modest 2% year-over-year decline, totaling $3.79 billion. However, its earnings per share (EPS) rose by 22% compared to the same period last year, a testament to the company’s ability to enhance profitability even in challenging market conditions.
Although the coming quarter is expected to see another dip in sales, Lam is positioned to benefit from the anticipated increase in chipmaking equipment purchases set to begin in the latter half of 2024. The company’s clientele, which includes Taiwan Semiconductor Manufacturing, Intel, Samsung, and Micron Technology, is under pressure to meet the burgeoning demands of AI. This translates to a greater need for advanced, higher-margin equipment.
Why Lam Matters to AI
One of Lam’s strengths lies in its specialized equipment for creating high-bandwidth memory (HBM) chips. These chips play a critical role in AI systems, facilitating rapid data transfer to the powerful GPUs driving AI applications. Lam’s equipment for creating through-silicon vias (TSVs) is essential in the manufacture of these HBM devices.
In terms of logic chips, which are fundamental to AI systems, Lam’s new machinery enhances lithography efficiency, a technology primarily supplied by ASML. Moreover, the company’s innovations in backside power delivery could redefine chip manufacturing by improving the power efficiency of high-end chips.
Lam’s Growth Potential
Industry analysts predict that Lam Research’s sales could exceed $20 billion by 2026, driven by the increasing demand for advanced chip fabrication equipment. Research firm Semi.org estimates that by 2026, the spending on advanced fab equipment could rise to $120 billion, a significant jump from the $90 billion spent in 2022.
The Strategic Advantage of Investing in Lam
Lam’s ability to enhance its profit margins and buy back stock during growth cycles has been a consistent strategy. This approach has contributed to its steady EPS growth over the last decade. The company trades at approximately 33 times trailing 12-month EPS and 26 times trailing 12-month free cash flow, with profitability expected to improve as the semiconductor market recovers.
Investors looking for long-term opportunities should consider Lam Research for its proven resilience and market-beating performance, despite the inevitable cyclical nature of the industry. Lam has demonstrated its ability to ride the highs and lows of the market, making it a solid bet for those willing to weather the ride.
In conclusion, Lam Research plays a crucial role in AI development, providing the essential technology needed to manufacture advanced chips. Its robust strategy, expanding market, and strong growth potential make it a compelling choice for investors seeking exposure to the AI revolution.