3. Lam Research Corp (NASDAQ:LRCX)
Number of Hedge Fund Investors: 58
Jim Cramer was recently asked about Lam Research Corp (NASDAQ:LRCX). He said it’s a cheap stock and recommended investors to buy it.
“That stock is so cheap. Oh, I want to buy it, I want to buy it. We have so much semi in the charitable trust, but that stock is the cheapest I’ve seen in a long time. I really like Lam Research Corp (NASDAQ:LRCX).”
Lam Research Corporation (NASDAQ:LRCX) is one of the largest providers of etching equipment for the semiconductor industry. Etching refers to any technology that will selectively remove material from a thin film on a substrate.
China-related concerns have weighed on the stock but the bulls believe that’s an overreaction and the stock has secular growth catalysts, especially due to AI.
As the third-largest semiconductor equipment supplier globally, LAM Research (NASDAQ:LRCX) dominates the etching process. Over the past decade, LAM Research (NASDAQ:LRCX)’s market share has averaged between 45% and 55%. The semiconductor equipment market has consolidated among a few major players, creating an oligopoly. Similar to how ASML dominates lithography, AMAT and Tokyo Electron control deposition, and KLAC leads in process control, LAM Research (NASDAQ:LRCX) benefits from high switching costs, large R&D investments, and experience-driven improvements. These factors contribute to its strong EBIT margins and return on capital.
LAM Research (NASDAQ:LRCX)’s largest customers are memory manufacturers, who have increased their use of Memory Wafer Fabrication Equipment (WFE). From 2010 to 2023, memory WFE consumption accounted for 64% of total WFE, up from 46% during 2001-2009. Additionally, as semiconductor designs have evolved from 2D to 3D, more etching steps are required in the manufacturing process, further driving demand for LAM Research (NASDAQ:LRCX)’s equipment.
Vltava Fund stated the following regarding Lam Research Corporation (NASDAQ:LRCX) in its Q4 2024 investor letter:
“In the quarter just ended, we added to the portfolio two new companies from the technology sector: Applied Materials and Lam Research Corporation (NASDAQ:LRCX). Both are in the same industry as is another of our investments that we have held for some time, KLA Corporation. This industry is termed semiconductor devices and materials. One chapter in Hidden Investment Treasures is devoted to investing in technology companies and, among other things, the controversy over what really constitutes a technology company. As investors, we try to view technology companies not according to the industry into which they are formally classified but by whether the technologies and technological processes used in the production of their products and services are an essential element in value creation or if they are a source of long-term, sustainable competitive advantage. Among the companies that are formally categorized as technology-based and fall into either the Information Technology or the Communications Services sector, we find some that can be said to be just that but also others for which this classification is at least debatable. Similarly, among companies that do not formally belong to these two sectors, we find many that clearly are built to a large extent on technology and base their market positions and competitiveness on it. In the cases of Applied Materials and Lam Research, there can be no doubt that these are technology companies not only as a formality but also in fact.
Dozens of companies are directly or indirectly involved in the production of semiconductors. Within this broad group of companies, there are several without which it would not be possible to produce advanced types of semiconductors in the world today. These include a group of five very well-known companies, each of which has a dominant global position in its particular field, and which together operate more or less as oligopolies. These are Lam Research, Applied Materials, KLA Corporation, ASML, and Tokyo Electron. At the end of the year, we benefited from a significant correction in the share prices of Applied Materials and Lam Research, and, together with KLA Corporation, we now own three of them. We view these as one collective investment into a critical point within a very important segment of the global economy that is growing and will continue to grow over the long term.
Lam Research manufactures wafer fabrication equipment for the semiconductor industry and also provides related services. The company is a market leader in plasma etching, thin film deposition platforms, photoresist systems, as well as wet and plasma-based cleaning products for individual wafers. Its main customers are the four major semiconductor manufacturers Micron, Samsung, SK Hynix, and Taiwan Semiconductors. Lam Research is a business with net margins of around 27% and ROCE of about 30%. Capital outlays are relatively small. The company has good capital allocation with a preponderance of share buybacks…” (Click here to read the full text)
