We recently published a list of 10 Best Semiconductor Equipment Stocks to Buy Now. In this article, we are going to take a look at where Lam Research Corporation (NASDAQ:LRCX) stands against other best semiconductor equipment stocks to buy now.
Semiconductors are the modern-day equivalent of oil when it comes to the general well-being of the global economy. Tens of thousands of gadgets, computers, cars, and other items and products rely on a steady stream of chips to power up today’s world. As a result, chip manufacturers often have a steady flow of orders that they have to consistently churn out to ensure that a multitude of industries are not disrupted.
However, while chip manufacturers often see most media coverage, the complex nature of transforming sand into a chip capable of 20 petaflops of output requires thousands of steps. To execute these steps, manufacturers rely on a diverse set of suppliers for a myriad of products such as chip manufacturing machines, specialty chemicals, masks, design technologies, and other items. Firms that provide these products and technologies are called semiconductor equipment providers and their role in the industry is just as important as the chip manufacturers’ is.
To understand why semiconductor equipment stocks are important, consider the Biden Administration’s $280 billion CHIPS and Science Act. Signed by the President in 2022, it aims to ensure that the American semiconductor industry catches up to its peers in Taiwan and South Korea and is not dependent on any disruptions in the South China Sea. The biggest beneficiary of the CHIPS Act is the Taiwanese contract chip manufacturer that leads the world in manufacturing technologies. It ranked 4th on our recent list of trending AI stocks, and the firm has received $6.6 billion in direct funding and it is eligible for $5 billion in additional loans to set up advanced manufacturing facilities in Arizona.
Yet, even though the first of these facilities is set to start production in the first half of 2025, the fact that the firm’s operations are based in Taiwan is already creating problems. For starters, a report from Reuters suggests that the world’s leading AI GPU manufacturer (which ranked 3rd on our list above) might have to ship its GPUs to Taiwan for packaging after they’ve been manufactured in the US. This is because after the chips are manufactured, they have to be packaged to ensure power supply and communications with the rest of the computer system.
The packaging technologies for these advanced chips are called Chip-on-Wafer-on-Substrate (CoWoS), and for the Taiwanese firm, all of its packaging facilities are located in its home region. The need to ship the chips to Taiwan for packaging is not the only hurdle for the fab’s American manufacturing operations. Another problem, and one that is directly related to semiconductor equipment stocks, relates to the different chemicals that are required throughout the chip manufacturing process.
These chemicals include sulfuric acid, acetone, ammonium hydroxide, and others to ensure the purity of the silicon wafer throughout the fabrication process. However, according to a report from Macquarie Bank, since the Taiwanese fab relies on Taiwan-based firms for its chemical supply chain, the costs of manufacturing chips at the Arizona site could be 30% higher than in Taiwan. The higher costs stem from the fact that the chemical companies are hesitant to move to the US since they might be unable to enjoy economies of scale and the resulting cost benefits. The bank outlines that the lack of an American chemical supply chain that is qualified by the Taiwanese fab means that chemicals such as sulfuric acid might be costlier to ship internationally than their list price.
Therefore, it’s clear that semiconductor equipment firms play an equally important role in chip fabrication. Another important example of this fact is the Dutch chip manufacturing machinery provider that ranked 9th on a recent list of AI news and ratings that Wall Street was watching. This firm is the only company in the world capable of manufacturing high-end chip-making tools called EUV scanners. Without these tools, firms such as the Taiwanese fab cannot make leading-edge chips with feature sizes smaller than 7-nanometer. In fact, the rising threat of China utilizing Western technologies for military use has also led the US government to stop the chip manufacturing equipment provider from selling its equipment to China’s Semiconductor Manufacturing International Corporation (SMIC). The sanctions have dealt a sharp blow to Chinese chip manufacturing ambitions, with the latest chip from Huawei still being manufactured on the older 7-nanometer node. In contrast, the latest iPhone uses chips built through the 3-nanometer process technology.
Our Methodology
To make our list of the best semiconductor equipment stocks to buy, we ranked all US-listed semiconductor equipment stocks by the number of hedge funds that had bought the shares in Q3 2024 and picked out those with the highest number of investors.
Why are we interested in the stocks that hedge funds invest in? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A technician operating an automated semiconductor processing machine with laser accuracy.
Lam Research Corporation (NASDAQ:LRCX)
Number of Hedge Fund Holders In Q3 2024: 58
Lam Research Corporation (NASDAQ:LRCX) is an American semiconductor manufacturing equipment provider whose products are used in several phases of the chip manufacturing process such as etching and deposition. Yet, despite this, the shares are up by a modest 1.8% year-to-date. While industry sluggishness has had a role to play in the drop, Lam Research Corporation (NASDAQ:LRCX) has also struggled due to semiconductor tensions between the US and China. The shares fell by a sizable 14.8% in mid-July after reports of fresh American sanctions against China and then dipped by another 17% after the firm’s second-quarter earnings saw 39% of revenue being derived from China. However, Lam Research Corporation (NASDAQ:LRCX) has also benefited from AI catalysts that led it to beat second-quarter revenue estimates, and the broader chip recovery coupled with China tensions should drive the hypothesis moving forward.
Columbia Threadneedle Investments mentioned Lam Research Corporation (NASDAQ:LRCX) in its Q3 2024 investor letter. Here is what the fund said:
“Lam Research Corporation (NASDAQ:LRCX) was a disappointing position for the fund during the quarter despite strong long-term returns. The stock experienced volatility in July on the back of a rotation out of large-cap technology into small-cap stocks and some general investor fears about the ROI potential from the AI spend. Escalating tensions between the United States and China have impacted Lam’s returns, as U.S. restrictions on high-tech exports to China, particularly advanced AI chips, have been a major negative for chip providers. The fund had an overweight position to Bloom Energy during the quarter and the stock moved lower, which detracted from performance relative to the fund’s benchmark. We continue to believe that Bloom has the best technology in the world to solve the electricity shortage that overhangs new AI data center builds in the U.S. and around the world. Bloom’s fuel cells plug into natural gas lines and can fit on a data center’s campus without taking up too much real estate. Other solutions to the “time to power” issue inherently take too long to provision, namely, nuclear, wind and solar power as well as new transmission and generation infrastructure.”
Overall, LRCX ranks 4th on our list of best semiconductor equipment stocks to buy now. While we acknowledge the potential of LRCX as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than LRCX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.