3. Lam Research Corporation (NASDAQ:LRCX)
Number of Hedge Fund Investors: 84
Lam Research Corporation (NASDAQ:LRCX) is one of the stocks that have historically outperformed after the Fed begins to cut rates, according to CNBC research quoted by Jim Cramer. Cramer said the stock has been “suppressed” amid a lack of orders from China and Intel slowing its manufacturing in Europe to preserve its balance sheet.
“If not for those issues I think it’d be a great buy right now but given that the industry has got problems I’d say let it come in even more but Lam Research is the best in the group.”
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 dominates the etching process. Over the past decade, Lam’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 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’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’s equipment.
Artisan Select Equity Fund stated the following regarding Lam Research Corporation (NASDAQ:LRCX) in its Q2 2024 investor letter:
“The top contributors to performance for the quarter were Alphabet, Lam Research Corporation (NASDAQ:LRCX) and Elevance. Lam Research shares rose 10% during the quarter and are up 67% over the past year, primarily due to optimism around the pending investment cycle in semiconductor capital expenditures. Lam is one of the largest equipment manufacturers used to make semiconductor chips. This equipment, commonly referred to as WFE (wafer fabrication equipment), is expected to experience significant growth due to a combination of a cyclical rebound in memory chips and growing demand for new AI-related chips. Lam’s product portfolio is particularly well positioned to benefit from both trends and should grow even faster than the overall market. Its shares now trade at ~30X prior peak earnings, which suggests this dynamic is well understood by the market and is mostly priced in.”
