Lam Research operates in the fast-growing semiconductor industry, where semiconductors are becoming increasingly complex. This trend of rising device complexity is particularly beneficial to Lam Research, as it drives greater demand for deposition and etch processes - areas in which Lam Research excels. As a result, Lam Research could be a strong long-term investment. However, the question remains: is now the right time to purchase shares? This is what I will investigate in this analysis.
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of Lam Research. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I don't own any stocks in Lam Research' competitors either. Thus, I have no personal stake in Lam Research. If you want to purchase shares or fractional shares of Lam Research, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.
The Business
Lam Research, founded in 1980 in California, United States, designs, manufactures, markets, refurbishes, and services semiconductor processing equipment used in the fabrication of integrated circuits. The company specializes in equipment for etching, deposition, and cleaning processes—core technologies essential for producing advanced semiconductors. Deposition, one of La Research's key specialties, involves adding ultra-thin layers of insulating and conductive materials to a silicon wafer, forming the fundamental building blocks of a chip. Techniques such as chemical vapor deposition and atomic layer deposition enable the precise application of materials, sometimes just a few atoms thick, to create components like copper wiring or protective insulators. Etching, by contrast, removes unwanted material to carve intricate patterns in the wafer, forming transistors, storage cells, and the pathways that enable the chip to function. Cleaning ensures that contaminants or residues from prior steps are removed, maintaining the chip’s integrity throughout production. The company operates with two primary revenue streams. Systems Revenue, accounting for approximately 60% of the total, derives from the sale of new wafer fabrication equipment. The remaining 40% comes from Customer Support-Related Revenue and Other (CSBG), which includes spare parts, upgrades, and services designed to extend the lifespan and performance of existing equipment. This diversification ensures that Lam Research's business is not solely reliant on new equipment sales but also benefits from recurring revenue generated by its extensive installed base of over 90.000 tools worldwide. Lam Research's moat lies in its technological leadership, operational scale, and deep integration with customers’ manufacturing processes. Its equipment is critical for producing increasingly smaller and more efficient chips required by technologies like artificial intelligence, cloud computing, 5G, and the Internet of Things. Switching away from Lam Research's tools would be prohibitively expensive and complex for most customers, ensuring strong and lasting relationships. Additionally, the company’s significant investment in research and development keeps it at the forefront of semiconductor manufacturing, making Lam Research a vital enabler of technological progress.
Management
Timothy Archer is the CEO of Lam Research. He joined the company in 2012 as Executive Vice President and Chief Operating Officer, assuming the role of CEO in December 2018. Before joining Lam Research, Timothy Archer spent 18 years at Novellus Systems, where he held various leadership positions. He holds a bachelor's degree in applied physics from the California Institute of Technology and has completed the Program for Management Development at the Harvard Graduate School of Business. Timothy Archer also serves on the Board of Directors for SEMI, the global industry association representing the electronics manufacturing and design supply chain. During his tenure as CEO, he has delivered impressive results, driving revenue growth of over 50% and increasing EPS by more than 85%. Although limited information is available about Timothy Archer, he appears to be well-regarded by employees, earning an employee rating of 83/100, which places him in the top 5% of companies of similar size. Given his extensive experience, proven track record, and positive employee feedback, I am confident in his ability to continue successfully leading Lam Research.
The Numbers
The first metric to evaluate is the return on invested capital (ROIC). Ideally, a company should have a 10-year history with ROIC exceeding 10% each year. Lam Research has consistently achieved a ROIC above 10% in nine out of the past ten years, with the only exception occurring several years ago. Since 2018, the company has experienced a significant increase in ROIC, consistently exceeding 20% annually, including during the pandemic, despite a slight dip in 2020. From 2021 to 2023, Lam Research maintained an exceptional ROIC above 30% each year. However, fiscal year 2024 proved challenging, marking the first time in more than a decade that revenue declined year over year due to macroeconomic factors. This decline also impacted ROIC, though the company still managed to achieve an impressive ROIC of nearly 30%. These figures indicate that Lam Research is a strong performer and suggest that it has the potential to be a long-term compounder.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. Overall, the numbers look strong. While there were years when equity declined, it has consistently increased every year since 2020. Encouragingly, equity reached an all-time high in 2024. Management has also highlighted their commitment to increasing equity through capital return programs and strategic financial planning. Based on this, I expect equity to continue its upward trajectory in the coming years.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is unsurprising that Lam Research has consistently generated positive free cash flow every year over the past decade. While free cash flow decreased slightly from fiscal year 2023 to fiscal year 2024, it remains at its second-highest level ever. Notably, the levered free cash flow margin increased in fiscal year 2024 and reached its second-highest level in the past decade, which is very encouraging. As Lam Research continues to grow its free cash flow, investors can anticipate increased share repurchases and higher dividends, in line with the company’s long-term goal of returning 75% to 100% of its free cash flow to shareholders. However, as of the end of fiscal year 2024, the free cash flow yield was below its ten-year average, suggesting the shares are trading at a premium price. This valuation will be revisited later in the analysis.
Debt
Another important factor to consider is the level of debt. It is crucial to assess whether a business has manageable debt that can be repaid within a three-year period. This is calculated by dividing total long-term debt by earnings. Based on my analysis, Lam Research has 1,17 years of earnings in debt, which is well within the three-year range. In fact, Lam Research has not exceeded three years of earnings in debt since 2016, highlighting its consistent financial discipline. This suggests that debt is not a concern and is unlikely to pose an issue moving forward.
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Risks
Macroeconomic conditions pose a significant risk for Lam Research due to its dependence on the cyclical semiconductor industry and the global economy. The demand for Lam Research’s equipment is directly tied to the capital expenditures of semiconductor manufacturers, which are influenced by broader economic factors such as consumer electronics spending, corporate technology investments, and overall economic growth. These dependencies make Lam Research particularly vulnerable to economic downturns or periods of uncertainty. During economic slowdowns, semiconductor manufacturers often reduce budgets for new equipment due to declining demand for integrated circuits or constrained access to credit. This directly impacts Lam Research’s sales, as its systems represent significant capital investments for customers. Furthermore, the company faces risks such as increased accounts receivable write-offs if customers default on payments and potential inventory write-downs if expected demand fails to materialize. The cyclical nature of the semiconductor industry exacerbates these challenges, with demand for chips fluctuating due to changes in electronics markets and technological advancements. These shifts make it difficult for Lam Research to maintain steady revenue and operational efficiency. Additionally, to safeguard its technological leadership and long-term customer relationships, Lam Research must sustain substantial investments in research and development and maintain its global support infrastructure - even during economic downturns—placing additional pressure on profitability in weaker periods.
Export restrictions, particularly on trade with China, present a significant risk for Lam Research due to its heavy reliance on international sales and the substantial share of revenue generated from the Chinese market, which accounted for 42% of total revenue in fiscal year 2024. U.S. government regulations limiting exports of semiconductor technology to China—such as expanded license requirements and restrictions on sales to certain Chinese companies—have already had a tangible impact, including the loss of a major NAND customer in China. These restrictions create operational challenges and uncertainty, as licenses are not always guaranteed. China’s significance as a rapidly growing semiconductor market further amplifies this risk. Lam Research faces the possibility of long-term market share erosion if Chinese customers increasingly turn to non-U.S. competitors unaffected by these restrictions. Additionally, retaliatory actions by the Chinese government, such as incentivizing local suppliers or mandating technology transfers, could further undermine Lam Research’s competitive position in the region. With 93% of Lam Research’s revenue in 2024 derived from non-U.S. markets, the company’s dependence on international sales, and particularly on China, makes export restrictions a material risk that could significantly impact its revenue and long-term growth prospects.
Competition poses a significant risk to Lam Research due to the fast-paced and highly competitive nature of the semiconductor equipment industry. The company must continuously innovate to meet evolving customer demands, but failure to anticipate needs, allocate sufficient resources, or successfully bring new products to market could result in losing ground to faster or better-positioned rivals. Industry consolidation and the rise of regionally focused competitors, some backed by substantial government support, further intensify the competitive landscape. These competitors may offer broader product portfolios or significant price discounts, pressuring Lam Research to compete on price, potentially eroding its margins. Additionally, strategic relationships between competitors and leading semiconductor manufacturers can limit Lam Research’s access to key accounts. Once a competitor’s tools are entrenched in a customer’s production lines, switching costs for semiconductor manufacturers are often prohibitively high, making it challenging for Lam Research to win new business. To maintain its competitive edge, Lam Research must sustain substantial investments in research and development, customer service, and rapid innovation. However, these efforts require significant resources and face pressure from aggressive competition, which could impact the company’s market position and long-term financial performance.
Reasons to invest
Lam Research’s leadership in etch and deposition technologies is a compelling reason to invest in the company, as these processes are becoming increasingly critical for the semiconductor industry. Etch and deposition are fundamental steps in chip manufacturing, where materials are precisely added and removed to construct the microscopic structures powering modern devices. These processes require atomic-level precision, enabling the development of smaller, more efficient, and more powerful semiconductors. This expertise is particularly vital in meeting the demands of artificial intelligence (AI) and advanced computing, which drive the need for constant innovation in materials, device scaling, and advanced packaging techniques. Lam Research’s tools are instrumental in supporting advanced memory technologies, such as NAND and DRAM, which are essential for AI-driven applications. The company excels in enabling next-generation memory production, particularly as manufacturers adopt high-layer 3D stacking - a process that significantly increases the complexity of etch and deposition. Lam Research’s solutions also help customers upgrade existing production lines efficiently, leveraging its extensive installed base and advanced technologies to deliver higher performance at lower costs. As AI continues to expand, driving demand for faster processors, high-bandwidth memory, and more efficient storage solutions, Lam Research’s tools will remain indispensable in enabling the next generation of semiconductors.
Lam Research’s Customer Support Business Group (CSBG) is a compelling reason to invest in the company, given its significant revenue contribution and ability to deliver consistent returns. In 2024, CSBG accounted for 40% of Lam Research’s total revenue. A key strength of CSBG is its recurring revenue model, sustained by Lam’s installed base of over 90.000 tools worldwide. Each tool shipped generates ongoing demand for spares, services, and upgrades, creating a stable and predictable income stream. As semiconductor manufacturing processes become increasingly resource-intensive and technologically complex, the need for regular maintenance and enhancements has grown. Lam Research’s comprehensive global service and support capabilities enable it to meet this demand effectively. Mature nodes, supported by reliant systems, have been a strong area of growth for CSBG, as they remain essential for a wide range of applications. Furthermore, upgrades are poised to play an even larger role in CSBG’s revenue mix as memory fabs, which have seen limited investment in recent years, begin modernization efforts. These upgrades, aimed at enhancing capacity and reducing costs, are expected to drive significant customer spending in the near future. CSBG’s diverse portfolio - including spares, upgrades, and services—positions Lam Research to capture value from its expansive installed base while supporting customers in navigating technological advancements and increasing manufacturing complexity.
Lam Research’s commitment to research and development (R&D) is a key reason to invest, as its innovations drive advancements in chip manufacturing and position the company for long-term growth. By working closely with customers, often years ahead of emerging challenges, Lam Research ensures it remains at the forefront of critical technological shifts, including advanced memory chips, smaller transistors, and more efficient power delivery systems. One example of Lam Research’s cutting-edge innovation is its DIRECTDRIVE tool, which delivers unparalleled precision in chip manufacturing. It rapidly stabilizes the production chamber environment, enabling the creation of smaller, more reliable components for advanced memory devices like DRAM. This technology helps manufacturers reduce errors and enhance performance as chips continue to shrink in size and grow in complexity. For NAND memory, Lam Research’s Cryo 3.0 technology represents a significant leap forward. It allows for deeper and more accurate etching, enabling memory makers to stack layers more efficiently and pack more data into each chip. Additionally, Cryo 3.0 offers notable environmental benefits, including reduced energy consumption and greenhouse gas emissions, making it both a technological and sustainable solution. Lam Research’s R&D efforts extend beyond current needs to future innovations, such as advanced packaging and next-generation transistor designs. By consistently addressing evolving industry challenges, Lam Research ensures its tools remain indispensable as the semiconductor industry continues to grow and advance.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 2,80, which is from fiscal year 2024. I have selected a projected future EPS growth rate of 12% (Finbox expects EPS to grow by 12% the next five years). Additionally, I have chosen a projected future P/E ratio of 24, which is twice the growth rate. This decision is based on the fact that Lam Research has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $53,43. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Lam Research at a price of $26,72 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is called the Ten Cap price. The rate of return that an owner of a company (or stock) receives on the purchase price of the company is essentially its return on investment. The return should be at least 10% annually, and I calculate it as follows: The operating cash flow last year was 4.652 and capital expenditures were 397. I attempted to review their annual report to determine the percentage of capital expenditures allocated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 278 in our calculations. The tax provision was 572. We have 1.291,958 outstanding shares. Hence, the calculation will be as follows: (4.652 – 278 + 572) / 1.291,958 x 10 = $38,28 in Ten Cap price.
The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Lam Research's Free Cash Flow Per Share at $3,25 and a growth rate of 12%, if you want to recoup your investment in 8 years, the Payback Time price is $44,77.
Conclusion
I believe that Lam Research is an intriguing company, and I have confidence in its management. Lam Research boasts a strong moat and has consistently achieved a high ROIC while delivering its second-highest levered free cash flow margin in fiscal 2024. Macroeconomic conditions pose a significant risk to Lam Research, as its performance is closely tied to the cyclical nature of the semiconductor industry and global economic trends. Economic downturns can reduce demand for its high-cost equipment as semiconductor manufacturers cut budgets, creating revenue challenges while Lam Research must continue investing in R&D and customer support to maintain its competitive edge. Export restrictions also represent a critical risk, as 42% of Lam Research’s revenue in 2024 came from China - a market heavily impacted by U.S. regulations limiting semiconductor technology exports. These restrictions could lead Chinese customers to seek non-U.S. suppliers, potentially eroding Lam’s market share in the region. Competition is another significant risk for Lam Research. The fast-paced semiconductor industry requires constant innovation to stay ahead of well-funded rivals and entrenched competitors. The high cost of switching suppliers and aggressive pricing strategies from competitors further challenge Lam Research’s ability to secure new business and maintain margins. Despite these risks, Lam Research’s expertise in etch and deposition technologies is a compelling reason to invest, as these processes are essential for creating smaller, more powerful semiconductors. Additionally, Lam Research’s Customer Support Business Group (CSBG) offers a strong recurring revenue model through spares, upgrades, and services supported by an installed base of over 90.000 tools. As semiconductor processes grow more complex, CSBG benefits from increasing demand for maintenance, modernization, and enhancements. Lam Research’s focus on research and development (R&D) underpins its leadership in chip manufacturing innovation, enabling advancements such as smaller, more reliable components and efficient memory stacking. I would love to add Lam Research to my portfolio. However, I don't believe that it will be available at a 50% discount in the near future. That said, sometimes you don't need a significant discount to initiate a position in a quality company. As Warren Buffett once said, "It is better to buy a wonderful company at a fair price than a fair company at a wonderful price." Thus, if I can purchase shares below $57, I will do so, as it would provide an approximate 25% discount on the Ten Cap price.
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