Lam Research: We Raise Our Valuation and Are Focused on Long-Term Secular Drivers

We raise our fair value estimate for wide-moat Lam Research LRCX to $660 per share, from $620, behind slightly raised margin assumptions over the next five years. We continue to expect a top-line decline in fiscal 2024 as chipmakers, particularly in memory, reduce their capital expenditures in response to softer demand. Nevertheless, we are focused on long-term trends toward higher chip complexity, including high-bandwidth memory, gate all-around transistors, and advanced packaging that we believe will fuel durable growth. We see shares as slightly undervalued.

Lam Research is one of the largest providers of wafer fabrication equipment for semiconductors in the world, and we believe its strong portfolio, particularly for memory chip production, should enable it to maintain and grow its large market share. In our view, Lam will benefit from increasing chip complexity over the long-term, including progress toward higher memory chip density and high-bandwidth memory. We expect Lam to grow sales in the midsingle digits over the course of market cycles and over the long term.

We expect Lam’s results to vary with the cyclicality of the semiconductor industry, but believe it will grow over the long-term. The firm’s sales are a function of global chip volumes and overall chip complexity, and while we see cyclicality in the former, we see durable growth for the latter. Trends toward rising layer counts in 3D NAND chips, high-bandwidth memory DRAM chips for artificial intelligence, gate all-around transistors and advanced packaging will drive demand for Lam’s equipment and revenue growth through cycles, in our view. We monitor for geopolitical risk impacting Lam via export restrictions applied between the US and China, but see these controls primarily impacting lithography equipment and chip designers thus far. We also like Lam’s significant shareholder returns, funded with its heady cash flow.