AI And IoT Will Expand Advanced Semiconductor Equipment Demand

Key Takeaways

• AI-driven chip complexity and product leadership set Lam up for multi-year revenue and margin acceleration, outpacing sector-wide growth expectations.
  
• Regionalized manufacturing and proprietary technology adoption give Lam structural margin advantages and long-term recurring, high-margin service and software revenues.
  
• Exposure to geopolitical risk, customer concentration, industry disruption, and rising competition threaten Lam Research's future growth, market share, and margin stability.

Catalysts

Designs, manufactures, markets, refurbishes, and services semiconductor processing equipment used in the fabrication of integrated circuits.

• Analyst consensus expects Lam to outgrow overall WFE by expanding its served market and gaining share in key technology inflections, but this likely underestimates the magnitude and duration of Lam's outperformance given the unprecedented pace of AI-driven chip complexity and the company's record product wins, which position Lam for multi-year, double-digit revenue and margin acceleration rather than single-digit gains.
  
• Analysts broadly agree Lam's "close to customer" manufacturing strategy offers incremental margin improvement, but this underplays the transformative operational leverage as the global chip supply chain regionalizes; Lam's distributed footprint will allow it to structurally beat peers on gross and operating margins, potentially driving sustained margin expansion beyond historical peaks over the next cycle.
  
• The explosion of AI and high-performance computing is creating a step-function increase in demand for next-generation NAND, DRAM, and logic devices, and Lam's leading technologies for higher layer counts, dry EUV, and advanced packaging place it as the top beneficiary for equipment order growth, suggesting an expanding long-term revenue base and higher earnings power as secular demand compounds.
  
• As governments worldwide accelerate national semiconductor initiatives and invest hundreds of billions into new fab buildouts, Lam's unmatched supply chain agility and multi-region manufacturing presence position the company for outsized share in greenfield projects and equipment localization-offering multi-year tailwinds to both revenue growth and resilience in the face of geopolitical shocks.
  
• Lam's industry-first deployment of equipment intelligence, machine learning, and virtual fabrication platforms like SEMulator3D are rapidly becoming vendor standards, which not only enhances recurring high-margin service revenue but also embeds Lam's tools deeper into customers' roadmaps, locking in long-term share gains and supporting EPS growth through recurring, higher-margin software and analytics streams.

Lam Research Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Lam Research compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Lam Research's revenue will grow by 9.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 27.2% today to 27.5% in 3 years time.
• The bullish analysts expect earnings to reach $6.3 billion (and earnings per share of $5.24) by about July 2028, up from $4.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 31.9x on those 2028 earnings, up from 27.8x today. This future PE is greater than the current PE for the US Semiconductor industry at 31.1x.
• Analysts expect the number of shares outstanding to decline by 1.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.58%, as per the Simply Wall St company report.

Lam Research Future Earnings Per Share Growth

Risks

• Geopolitical tensions and trade restrictions, particularly those between the US and China, pose significant and persistent risks to Lam Research's ability to maintain and grow revenues, especially since a substantial portion of the company's sales and customer engagements are tied to China and other Asian markets that may be subject to future export bans or tariffs, putting pressure on both top-line growth and long-term earnings.
  
• Heavy reliance on a small set of large customers such as TSMC, Samsung, and domestic Chinese foundries increases Lam Research's vulnerability to customer capital expenditure cycles and contract renegotiations, which could result in heightened revenue and earnings volatility during market downcycles or shifts in customer strategy.
  
• The accelerating pace of technology disruption in the semiconductor industry, including the rise of new computing paradigms such as quantum computing or increasing adoption of alternative materials and processes, could erode demand for Lam's legacy etch and deposition products, resulting in a shrinking addressable market and possibly lower net margins over the long term.
  
• Intensifying global competition, especially from state-backed or new Asian equipment manufacturers, threatens Lam's historical pricing power and market share, which could lead to margin compression and lower future profitability if Lam cannot continue to differentiate or defend its technological leadership.
  
• The recurring cyclicality and risk of overcapacity in the semiconductor industry, combined with the potential for large chip manufacturers to shift to in-house equipment production or to alternative suppliers, could sharply reduce demand for Lam's products and services, resulting in a lower and more volatile revenue base in future years.

Valuation

• The assumed bullish price target for Lam Research is $124.25, which represents two standard deviations above the consensus price target of $96.22. This valuation is based on what can be assumed as the expectations of Lam Research's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $125.0, and the most bearish reporting a price target of just $70.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $22.7 billion, earnings will come to $6.3 billion, and it would be trading on a PE ratio of 31.9x, assuming you use a discount rate of 9.6%.
• Given the current share price of $101.07, the bullish analyst price target of $124.25 is 18.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.