Lam Research (LRCX, Financial) is a technology company that produces wafer-processing semiconductor manufacturing equipment, having an international presence in the U.S., Europe and Asia. There are many reasons to be excited about this stock now in my opinion, starting with strong profitability, a solid balance sheet and continued innovation in shaping the future of the semiconductor industry.
The stock price has already gained around 48% year-to-date, outperforming the Nasdaq Composite index's rise of 30%. Even so, I don't think this is a bubble; in fact, I believe this momentum has more legs to continue in 2023 and beyond. Here's why.
Cutting-edge innovation in a key industry
Lam Research has recently introduced Coronus DX, which is the industry's first bevel deposition solution optimized to address key manufacturing challenges in next-generation logic, 3D NAND and advanced packaging applications.
Sesha Varadarajan, senior vice present of the Global Products Group at Lam Research, stated, "Building on Lam's expertise in bevel innovation, Coronus DX helps drive more predictable manufacturing and significantly higher yield, paving the way for the adoption of advanced logic, packaging and 3D NAND production processes that weren't previously feasible."
This product enhances the dominant role of Lam Research in bevel technology. According to Anne Roule, head of the Semiconductor Platform Division at CEA-Leti, "By simplifying 3D integration, Coronus DX drives significantly higher yield and enables chipmakers to adopt breakthrough production processes."
This is one of many examples that just goes to show that Lam Research has an important market leader position that should help drive sustainable revenue growth as semiconductors today are used in almost every electronic device, from a laptop and a mobile phone to refrigerators. Semiconductor use is expected to increase as technology develops, especially artificial intelligence (AI).
The importance of wafer processing semiconductor manufacturing equipment
Wafer processing equipment is Lam's (and the semiconductor industry's) bread and butter. Lam's equipment plays a crucial role in semiconductor manufacturing. Investors might ask, what's so great about this industry? What are its growth prospects?
For some background, wafer processing equipment conducts processes such as deposition, etching and patterning of thin films and layers on semiconductor wafers. As the industry leader, the high precision of Lam's equipment ensures more consistent and reliable manufacturing processes, leading to improved product quality and performance.
Semiconductor manufacturing requires large-scale production to meet the industry's demands. Wafer processing equipment quality is thus important to handle high volumes of wafers, allowing for efficient and continuous processing. Lam's high throughput capability enables manufacturers to produce a large number of semiconductor devices within a shorter timeframe, increasing productivity and reducing manufacturing costs.
Lam's offerings include systems that enable real-time monitoring of various parameters such as temperature, pressure, flow rates and chemical concentrations. By closely monitoring and controlling these variables, manufacturers can achieve consistent and repeatable process results, reducing variability and improving yield rates.
Modern wafer processing equipment is often highly automated and integrates with other equipment and systems in the manufacturing line. This integration facilitates seamless data exchange, process synchronization and automation, reducing manual intervention and minimizing human errors. Automation also enables faster processing times, higher productivity and improved overall equipment effectiveness (OEE). The quality and reliability of semiconductor devices thus heavily depends on the quality of the equipment used to produce them, which exponentially increases the importance of good equipment.
Semiconductor technology evolves rapidly, and processing equipment thus needs to evolve rapidly as well, so it's not certain that Lam will keep its industry leadership position forever. However, the incumbent leader does still have a key advantage that is difficult to encroach on, and industry leaders typically have higher profitability and more funds to spend on research and development.
The fundamentals look great
One common mistake in investing is to think that a great company must naturally be a good investment, but that is not the case. It may be overvalued, or it may have poor financials.
Lam's valuation appears attractive based on its GF Value of $657.75, which implies it is fairly valued. This qualifies as a great company at a fair price in my opinion.
At 98 out of 100, the GF Score indicates the company has outperformance potential based on a historical study from GuruFocus.
The company has a 4.5-star business predictability rank. The profitability is great with a net margin of 21.04% as of March 2023. Lam's five-year average operating margin growth rate was 4.60% per year, which is incredible. The balance sheet is very strong with a healthy debt-to-equity ratio of 0.6.
Overall, I believe Lam is fairly valued, and more upside potential lies ahead as the company continues to be a leader in a rapidly-growing industry with great prospects.
