Share prices of Lam Research (LRCX -2.10%) have been hammered in 2022 thanks to a sell-off in technology stocks, triggered by potential interest rate hikes by the Federal Reserve this year.
The semiconductor equipment supplier's stock has dropped despite the terrific pace at which its revenue and earnings are growing, driven by the booming demand for chipmaking equipment. The company's fiscal 2022 first-quarter revenue increased 35% year over year to $4.3 billion, while adjusted earnings jumped 47% to $8.36 per share.
LRCX data by YCharts
Investors can expect another round of solid results from Lam Research when it releases its fiscal 2022 second-quarter results (for the three months ending in December 2021) on Jan. 26, 2022, which could help the stock regain its mojo. Let's see why that may be the case.
A strong earnings report is in the cards
According to the guidance issued by Lam Research in October 2021, the company's Q2 revenue should land at $4.4 billion at the midpoint of the range. Adjusted earnings are expected to be $8.45 per share. These numbers would be a huge improvement over the year-ago period's revenue and earnings of $3.46 billion and $6.03 per share, respectively.
More specifically, Lam's revenue is on track to increase 27% year over year, while earnings could jump 40% if the company manages to hit the midpoint of its guidance range. Wall Street, however, has higher expectations from Lam, anticipating $8.50 per share in earnings on revenue of $4.41 billion.
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It won't be surprising to see Lam meet the heightened expectations thanks to the steps it has taken to boost sales and satisfy the robust demand for its offerings. The company expanded the manufacturing capacity of its facilities in Taiwan, Korea, and the U.S. and opened a new facility in Malaysia in September last year. Lam has also announced the opening of a new factory in Oregon to meet the long-term demand from semiconductor companies, especially memory manufacturers.
In fact, Lam points out that spending on wafer fabrication equipment (WFE) increases in the second half of the year, which is further indication that the company closed 2021 on a high.
Lam Research is built for long-term growth
Lam gets most of its revenue from memory manufacturers. Sales of DRAM (dynamic random access memory) and NVM (non-volatile memory) equipment accounted for 64% of its total revenue in the fiscal first quarter. The NVM market is Lam's biggest source of revenue, accounting for 45% of the top line in Q1.
The good part is that both these memory segments are set up for impressive long-term growth. Mordor Intelligence estimates that the NVM market could grow at an annual rate of over 13% through 2026, hitting $110 billion in revenue as compared to $52 billion in 2020. Smartphones, wearable devices, and data centers are some of the verticals expected to drive the NVM market's growth in the future.
The DRAM market, on the other hand, is expected to grow to $206 billion in 2028 from $105 billion in 2020 per a third-party estimate. Not surprisingly, memory manufacturers are ramping up their manufacturing capacities to serve this expanding market.
Micron Technology, for instance, outlined a decade-long investment plan of $150 billion to shore up its research and development and memory manufacturing in October last year. Meanwhile, memory is expected to be a major focus of Samsung's $205 billion three-year capital expenditure plan announced in August 2021.
These tailwinds indicate why analysts expect Lam's earnings to grow at an annual pace of 16% for the next five years, which makes the stock an enticing bet going into its upcoming earnings report, as it is trading at 20.5 times trailing earnings. This is a discount to the S&P 500's earnings multiple of 28.5.
A strong set of results could accelerate Lam Research's rally and make this growth stock expensive, so investors looking to add a value play to their portfolios may consider making their move before the earnings are out.
