We came across a bullish thesis on Lam Research Corporation (LRCX) on Substack by Daan Rijnberk. In this article, we will summarize the bulls’ thesis on LRCX. Lam Research Corporation (LRCX)’s share was trading at $72.61 as of March 28th. LRCX’s trailing and forward P/E were 22.07 and 17.54 respectively according to Yahoo Finance.
An aerial view of a modern fabrication center with equipment for producing semiconductor components.
Lam Research (LRCX), the third-largest provider of semiconductor manufacturing equipment, presents a compelling long-term investment. Since its 2013 merger with Novellus, the company has demonstrated impressive growth, with revenue expanding at a 14% CAGR and EPS at 24% CAGR. This success is driven by increasing semiconductor complexity, market share gains, and disciplined capital allocation, including significant share buybacks. With a $96 billion market cap and $17 billion revenue run rate, Lam remains well-positioned for continued expansion. AI and high-performance computing trends are fueling demand for its core manufacturing processes—Deposition, Etching, and Wafer Cleaning—making it an essential supplier to TSMC, Intel, Samsung, and GlobalFoundries. Management forecasts low to mid-double-digit revenue growth and a high-teens EPS CAGR through 2028, outpacing the broader wafer fabrication equipment (WFE) industry.
A key strength of Lam’s business is its Customer Support Business Group (CSBG), which generates recurring revenue from maintenance contracts and system upgrades. Since 2013, CSBG has grown at a 17% CAGR and remained resilient through industry downturns. In fiscal Q2, CSBG revenue rose 20% YoY to $1.8 billion, reflecting strong demand for equipment upgrades. With an installed base of 96,000 tools, this segment strengthens Lam’s cash flow generation. Lam’s financials highlight its capital efficiency. Gross margins reached 48.2%, the highest since the Novellus merger, while operating margins expanded from 15% in 2013 to over 30% today. In fiscal 2024, Lam returned nearly $4 billion to shareholders, allocating 98% of its free cash flow to dividends and buybacks. Over the past decade, it has retired 65% of its shares, contributing significantly to EPS growth.
The semiconductor sector has outperformed over the past decade, with WFE spending growing 1.7x the rate of semiconductors. AI-driven demand is accelerating this trend, with an estimated $200 billion in WFE spending over the next five years for data center expansion.
Lam’s core markets—etch and deposition—are growing even faster, essential for AI-driven advancements like 3D NAND, high-bandwidth memory, and next-generation logic chips. WFE spending per leading-edge wafer has surged 20% over the past five years, with projections for another 50% increase. Since 2013, WFE spending has grown at an 11% CAGR, while Lam’s revenue has compounded at 14% annually. Looking ahead, Lam expects NAND SAM to grow 1.8x, DRAM SAM 1.7x, and foundry/logic SAM 2x, supported by innovations like gate-all-around transistors and backside power distribution. With a strong product portfolio, Lam is poised to outpace the broader WFE industry.
Despite a strong outlook, Lam’s stock remains undervalued. Recent market pressures have left shares up only 2% YTD and down 25% over the past year. Trading at just 19.5x earnings with a PEG ratio of 0.9x, the stock is at a discount relative to historical averages and peers.
Management expects 2028 revenue between $25–27 billion, implying a 12.5% CAGR, with gross margins projected at 50%, operating margins at 34–35%, and $8 billion in annual free cash flow. At a sector-median PEG ratio, fair value is estimated at $99 per share, while a 22x earnings multiple suggests a 2027 price target of $111, implying a 16% CAGR from current levels. Given its strong risk-reward profile, Lam remains an attractive buy at current prices, presenting a compelling opportunity for long-term investors.
Lam Research Corporation (LRCX) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 84 hedge fund portfolios held LRCX at the end of the fourth quarter which was 58 in the previous quarter. While we acknowledge the risk and potential of LRCX as an investment, our conviction lies in the belief that some 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 was originally published at Insider Monkey.