Advanced Technologies To Strengthen Competitiveness Amid Rising WFE Spending In 2025

Key Takeaways

• Strategic R&D investments in advanced technologies enhance competitiveness, improve margins, and support Lam's revenue and earnings growth.
  
• Efficient ramp-up of Asia operations boosts responsiveness and margins, supporting profitability amidst rising demand.
  
• Export controls and reliance on NAND upgrades pose risks to revenue stability, while customer spending and rising expenses could pressure margins and earnings.

Catalysts

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

• Lam Research expects wafer fabrication equipment (WFE) spending to rise in 2025 to approximately $100 billion, with technology inflections in AI applications driving faster growth for the company. This should positively impact Lam's revenue as it leverages increased demand for semiconductor manufacturing equipment.
  
• The company’s strategic investments in R&D infrastructure and innovation processes are resulting in product advances, such as the Cryo 3.0 technology and Aether dry resist solution. These advancements are likely to strengthen Lam's competitiveness, contributing to improved net margins and earnings.
  
• Lam is positioned to benefit from the ongoing customer migrations toward advanced packaging and backside power distribution technologies. This is expected to result in increased shipments and revenue growth.
  
• The adoption of new technologies, such as molybdenum and carbon gap fill for NAND upgrades, is anticipated to drive hundreds of millions of dollars in shipments for calendar year 2025, enhancing Lam's revenue and supporting earnings growth.
  
• Lam's Asia operations are efficiently ramping up, contributing to gross margin improvements and better responsiveness to rising customer demand. This supports an expansion of operating margins and enhances overall profitability.

Lam Research Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lam Research's revenue will grow by 10.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.5% today to 28.0% in 3 years time.
• Analysts expect earnings to reach $6.1 billion (and earnings per share of $5.03) by about March 2028, up from $4.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $4.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.5x on those 2028 earnings, up from 23.2x today. This future PE is lower than the current PE for the US Semiconductor industry at 26.8x.
• Analysts expect the number of shares outstanding to decline by 1.82% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.66%, as per the Simply Wall St company report.

Lam Research Future Earnings Per Share Growth

Risks

• There is a significant reliance on upgrades in NAND, coupled with limitations on customer spending, which could affect sustained revenue growth if upgrade cycles do not meet expectations.
  
• Restrictions on certain Chinese customers due to export controls have resulted in a $700 million forecasted revenue drop for 2025, which could negatively impact overall revenue and market share in China.
  
• The Customer Support Business Group (CSBG) faces challenges with a potential decline in the Reliant product line, which might affect overall revenue stability despite anticipated growth in upgrades.
  
• Despite strategic investments, the company's gross margins could face headwinds due to customer concentration issues, potentially leading to volatile earnings.
  
• The anticipated growth in operating expenses, related to digital transformation and R&D investments, might pressure net margins if revenue growth does not keep pace.

Valuation

• The analysts have a consensus price target of $95.41 for Lam Research based on their expectations of its future earnings growth, profit margins and other risk factors. 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 $75.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $21.6 billion, earnings will come to $6.1 billion, and it would be trading on a PE ratio of 24.5x, assuming you use a discount rate of 8.7%.
• Given the current share price of $77.67, the analyst price target of $95.41 is 18.6% 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.