Lam Research (LRCX 2.65%) stock dropped 41% in 2022 after weathering a host of challenges, including inflation, a rising interest rate environment, U.S. export restrictions on chipmaking tools to China, and a downturn in the memory chip market toward the end of the year.

Now, the stock is on the rise again, with investors becoming increasingly optimistic about a potential end to interest rate hikes and an anticipated recovery in the memory chip market by 2024. As a result, the first half of 2023 has seen Lam Research's stock jump 54%.

You might be hesitant about investing in Lam after the stock's big run and in uncertain economic environment with various risks on the table. But if you are a long-term investor, it could be worth these risks to buy a few shares. Here's why.

1. The memory chip market should rebound by 2024

Much of Lam's revenue growth is contingent on the health of the memory chip market as a significant portion of its revenue mix consists of sales of semiconductor manufacturing equipment (SME) to the manufacturers of these chips.

When the memory market is doing well, Lam's customers are more likely to invest in new products and upgrade their existing ones, leading to increased demand for its chip manufacturing equipment. Conversely, when the memory market is doing poorly, its customers are less likely to invest in new manufacturing facilities or upgrade existing ones, decreasing demand for its products.

Some of Lam's key customers, like SK Hynix, Samsung, and Micron, have said the memory market should be at or near the bottom in June 2023 during each company's earnings report for the quarter ended in March. They base that assessment on the fact that memory chip prices have begun stabilizing, and they expect demand from smartphone manufacturers and other customers to improve.

Many investors bullish on Lam are optimistic about a memory market recovery in late 2023 or early 2024 and believe Lam's customers will ramp up their investments in semiconductor manufacturing capacity accordingly. This expected surge in investment should boost business.

2. The increasing complexity of new chips

Cutting-edge technologies -- like cloud computing, 5G, artificial intelligence, high-performance computing, and the Internet of Things -- require increasingly complex chips.

Building these complex semiconductors requires more sophisticated manufacturing processes as they become more complex, creating demand for new and more advanced semiconductor fabrication equipment. Lam is well-equipped to meet this demand, with a proven track record of innovation and expertise in complicated manufacturing processes.

Lam has committed heavily to investing in advanced materials and processes that can create features on chips at the atomic scale. These investments are part of the company's strategy to develop leading-edge technologies that enable customers to create the next generation of semiconductor devices.

As long as consumers and businesses demand increasingly more sophisticated smartphones, computers, and cars, there will be heavy demand for Lam's tools.

There are a few risks to the story

In the short term, the memory chip rebound that many expect could be slow or fizzle out for several reasons.

  • Forecasts errors: Experts may overestimate how long the current surplus in memory chips will take to clear, which could slow the rebound in memory chip prices.
  • Weak demand: Customers have refrained from purchasing new electronic gadgets due to the fear of a recession. If this trend continues, it may impede memory chip price recovery.
  • Competition: Competition among memory chip manufacturers could slow the rebound in memory chip prices if it leads to overcapacity, price wars, or technological transitions that reduce the profitability of memory chip makers.

In addition to short-term risks, Lam faces the long-term risk of technological obsolescence. The SME industry is highly competitive and constantly evolving, with new technologies being developed all the time. If it fails to keep up with the latest technologies, it could lose market share to its competitors.

Aim to buy as the memory market bottoms

Lam's stock trades at a price-to-earnings (P/E) ratio of 18.1, below its median P/E ratio of 19.2 over the past 10 years and well below the S&P 500's current P/E ratio of 25.8. Many investors consider the stock either slightly undervalued or fairly valued.

Lam Research has a proven track record of long-term returns and it is well-positioned to benefit from any improvements in the memory chip market. If you anticipate a rebound in the memory market within the next year, this is an excellent time to consider purchasing some shares.