Advanced Etch And Deposition Tools Will Open WFE Market Opportunities

Key Takeaways

• Lam Research aims to expand its market and boost revenue through advanced product offerings and innovative technology investments.
  
• Operational efficiencies and a focus on customer support are expected to enhance margins and stabilize long-term earnings.
  
• Tariffs, China restrictions, rising R&D costs, and market fluctuations pose risks to Lam Research's revenue, earnings stability, and future growth potential.

Catalysts

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

• Lam Research anticipates expanding its served market faster than overall WFE (wafer fab equipment) growth due to increased deposition and etch intensity, which is likely to positively impact revenue growth in the years ahead.
  
• The company expects to gain market share with its advanced product portfolio targeting significant technology inflections like gate-all-around and backside power distribution, which can contribute to higher revenues and potentially improve net margins through competitive differentiation.
  
• Lam Research foresees faster growth in its Customer Support Business Group (CSBG) revenue than its installed base, driven by customer upgrades and new offerings in productivity and equipment intelligence. This focus is expected to support revenue stability and enhance long-term earnings.
  
• Investments in innovative technologies like dry EUV photoresist processing and atomic layer deposition tools are opening up new market opportunities, which can drive revenue growth and support Lam’s strategic objectives for net margin expansion.
  
• Operational efficiencies arising from Lam’s close to customer manufacturing strategy are enhancing gross margins, suggesting potential improvements in operating margins and profitability as realized efficiencies flow through to the bottom line.

Lam Research Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lam Research's revenue will grow by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 27.2% today to 28.4% in 3 years time.
• Analysts expect earnings to reach $6.2 billion (and earnings per share of $5.07) by about May 2028, up from $4.7 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 22.7x on those 2028 earnings, up from 20.1x today. This future PE is greater than the current PE for the US Semiconductor industry at 22.5x.
• Analysts expect the number of shares outstanding to decline by 2.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.26%, as per the Simply Wall St company report.

Lam Research Future Earnings Per Share Growth

Risks

• Tariffs and global economic uncertainties create a dynamic environment, which could impact future demand and negatively affect Lam Research's revenue projections.
  
• The restriction on shipping to domestic China customers, who are classified as nonvolatile memory producers, may result in decreased system revenues and could affect overall earnings.
  
• Increased operating expenses, particularly in R&D activities, could pressure net margins if not offset by corresponding revenue growth.
  
• The anticipated lowering of deferred revenue balance by year-end could indicate a potential decline in future revenue streams.
  
• Exposure to market-related fluctuations in other income and expenses may lead to volatility in earnings from quarter to quarter.

Valuation

• The analysts have a consensus price target of $89.767 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 $70.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $21.7 billion, earnings will come to $6.2 billion, and it would be trading on a PE ratio of 22.7x, assuming you use a discount rate of 9.3%.
• Given the current share price of $73.16, the analyst price target of $89.77 is 18.5% 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.