Semiconductor stocks have been in raging form on the market this year. The PHLX Semiconductor Sector index gained a whopping 44% in 2023, which is not surprising as companies in this sector received a big lift from the growing adoption of artificial intelligence (AI) applications.

After all, semiconductors are going to drive the adoption of AI. From graphics cards used for training large-language models to field-programmable gate arrays (FPGAs) and application-specific integrated circuits (ASICs) for AI inference tasks, various kinds of chips are needed to make AI applications such as chatbots and search engines work.

This explains why Nvidia has been a big winner on the stock market in 2023 with astounding gains of 205%. Shares of the graphics card specialist lifted the semiconductor sector big time this year, and Lam Research (LRCX 6.27%) is one stock that benefited from this surge despite being in turmoil.

The memory industry downturn is hurting Lam Research

Shares of Lam Research delivered impressive gains of 51% this year, which seems surprising if you look at the following chart.

LRCX Revenue (Quarterly) Chart

LRCX Revenue (Quarterly) data by YCharts

The biggest reason why the company has seen a downturn in its fortunes of late is because of the weak demand for memory chips. Lam Research's semiconductor manufacturing equipment is primarily used in the memory industry, with the company getting a third of its total revenue from this market.

The downturn in the memory industry on account of weak personal computer (PC) and smartphone demand led to a decline in the demand for memory manufacturing equipment. That's because memory industry participants such as Micron Technology, Samsung, and others have reduced their capital expenditure budgets significantly as they are grappling with memory oversupply.

Micron, for instance, reduced its fiscal 2023 capital expenditure budget by 40% from the prior year. Its spending on wafer fab equipment is expected to decline more than 50% in the current fiscal year. Lam Research also points out that spending on memory chip equipment is expected to be down 50% in 2023 as compared to last year.

So, it is not surprising to see why Lam Research's revenue estimate of $17.3 billion for fiscal 2023 (which ended last month) is going to be flat over the fiscal 2022 revenue figure. However, Lam management believes the current level of investments in memory infrastructure is not enough to support the long-term growth in demand. Market research firm Gartner's estimate that the memory industry is set for a massive rebound of 70% next year following 2023's revenue decline of 35% supports Lam management's view.

After all, the arrival of new catalysts for the memory market in the form of AI could very well create the need for the memory manufacturing equipment that Lam sells. Let's see why.

AI could give the memory market a big boost

Memory chip manufacturer Micron recently said that "AI servers have six to eight times the DRAM content of a regular server and three times the NAND content." Not surprisingly, Micron added that the "recent acceleration in the adoption of generative AI is driving higher-than-expected industry demand for memory and storage for AI servers."

As a result, the demand for memory chips should accelerate and create the need for more memory manufacturing equipment. According to a third-party estimate, global memory demand could increase at an annual rate of 15% through 2030 on the back of emerging use cases that range from the Internet of Things to vehicles to AI. The demand for high-bandwidth memory, which is used in AI servers, is expected to clock nearly 26% annual growth through 2031.

So, Lam Research's fortunes should start turning around once memory demand picks up. Given that Lam Research stock is currently trading at just 17 times trailing earnings, which is quite cheap for a company that could take advantage of the AI revolution, investors would do well to keep this company on their watch lists. Or they may even start accumulating Lam Research before it flies higher and becomes more expensive.