What happened
Artificial intelligence (AI) investments are driving demand for advanced semiconductor manufacturing equipment. Leading equipment maker Lam Research (LRCX 2.65%) popped as much as 16.1% this week, according to data provided by S&P Global Market Intelligence, after putting up a revenue forecast that beat Wall Street estimates.
Shares of Lam Research are now up 74% this year and are back above all-time highs set during the pandemic bull market.
So what
If you just looked at Lam Research's current earnings, you wouldn't get that excited. Revenue for the equipment maker declined 25% from a year ago to $3.2 billion in the second quarter. This is a prime example of the cyclicality of the semiconductor equipment industry. Operating margin came in strong at 26.6%, compared to 24% in the prior quarter, but that is still well below the 32% operating margin in the year-ago quarter.
So what drove the stock higher? It was simply management commentary and third-quarter guidance. Lam Research is guiding for $3.4 billion in third-quarter revenue, $100 million higher than Wall Street estimates, which is being driven by growth in AI demand from computer chip companies.
Over the long term, management thinks that this will lead to much higher demand for semiconductor equipment sales. On the conference call for the quarter, CEO Tim Archer said that for every 1% increase in penetration for AI servers, that leads to over $1 billion in spending on semiconductor equipment machines.
As one of the leading semiconductor manufacturing equipment companies, along with Applied Materials and ASML, Lam Research is in a prime position to take advantage of this growing demand for AI capabilities. This should lead to strong revenue growth for at least the next few years, if not longer.
Now what
Shares of Lam Research do not look absurdly cheap anymore, with the stock up 74% year to date. For a brief moment at the end of last year, it actually traded for a price-to-earnings ratio (P/E) under 10. Today, the P/E is around 22.
LRCX PE ratio data by YCharts.
A P/E of 22 isn't absurdly expensive, however. If you believe in the AI boom and think Lam Research can consistently grow its sales this decade, the stock could be a great buy even with shares at all-time highs.
