Emerging from a bearish phase, Lam Research is catching attention. Although there’s significant buzz around semiconductor design stocks and tech giants optimistic about generative AI services like ChatGPT, the financial excitement hasn’t immensely impacted the broader economy—yet perhaps things are changing.
This year has seen a decline for companies producing chip manufacturing equipment, vital for AI systems, due to their clients’ budgetary constraints. However, AI might be stirring these companies from their bearish trend sooner than predicted.
During its recent earnings announcement, Lam Research (NASDAQ: LRCX), a leading equipment manufacturer, hinted at this shift. Despite a challenging year, Lam forecasts an upcoming uptick in revenue. Advances in chip technology and innovative packaging methods might offer a boost shortly. Given the stock’s rally in 2023, it seems like an undervalued gem.
A Less-than-Stellar Quarter: What’s Fueling the Enthusiasm?
To be blunt, Lam’s quarter ending June 2023 wasn’t impressive. Revenue dropped by 31% year over year and 17% quarter over quarter, settling at $3.21 billion. The EPS went down 32% year over year but showed a marginal decline from the prior quarter. Lam’s stock buybacks and cost-saving strategies deserve credit here, reducing the total share count by 0.7% from March to June 2023.
Despite these figures, the stock surged after the report, boasting a 70% rise in 2023. What’s driving this momentum? Investors are hooked on Lam’s forecast, which projects better financial performance. The projected revenue for the upcoming quarter ending in September stands at $3.4 billion, with an optimistic EPS of $6.57. The semiconductor industry’s slowdown might be ending for top-tier manufacturers like Lam.
AI as a Saviour
It might be surprising to credit AI for Lam’s financial turnaround, especially since Lam is primarily a tech manufacturer. But the driving force behind this optimism is the surge in servers powering AI functions. CEO Timothy Archer mentioned that AI servers outperform traditional ones regarding logic, memory, and storage capacities. Every 1% growth in AI server usage could lead to an additional investment ranging from $1 billion to $1.5 billion in wafer fab equipment.
Lam, one of the semiconductor fab equipment industry’s “fab five,” stands to gain significantly from this. While they won’t capture the additional investment, a substantial chunk could be theirs. Recent product launches to create powerful chips and advanced packaging indicate their readiness.
While Lam’s association with the memory chip market has had challenges, the company’s shift towards logic chips and third-party foundry businesses looks promising.
Research from TrendForce supports this optimism, suggesting that the AI server market share might jump from 9% to 15% by 2026. Corroborated by the statements from Taiwan Semiconductor Manufacturing, this could mean a potential revenue of $9 billion for the “fab five” over the next few years, thanks to AI servers.
Is It Time to Invest in Lam Research?
While it’s early days for Lam’s recovery, predicting the heights their revenue and earnings might reach remains challenging. Yet, when considering Wall Street’s estimates for next year, Lam Research (and its peers like Applied Materials and KLA) seems to trade at around 20 times earnings. With the chip industry slowly rising, these stocks are beginning to look tempting.
Though I’ve remained wary of Lam Research as it surged this year, this caution, in hindsight, might have been premature for the past several months. Given their significant reliance on memory chip production and slow recovery in that sector, I would still recommend a cautious approach to investing in Lam. However, it’s undoubtedly worth keeping an eye on Lam Research.
In the dynamic realm of semiconductor manufacturing, industry trends can pivot rapidly. With its commitment to innovation and strategic focus on the future, Lam Research is showcasing potential even in challenging times. As AI continues its ascendancy, it’s poised to reshape various sectors, and companies at the forefront of hardware innovation, like Lam, stand to benefit. Investors would do well to tread carefully but also recognize the transformative opportunities in this space.
