In the semiconductor business, investors can easily overlook companies like Lam Research (LRCX 2.65%). As a maker of equipment for semiconductor manufacturers, its role in the chip industry can go unseen. Hence, design companies like Nvidia or chip manufacturers like Taiwan Semiconductor Manufacturing (TSMC) earn more public exposure.

However, even with a temporary slump in the semiconductor business, chip companies are on a building spree as they work to meet rising demand. This trend benefits companies like Lam Research, as fabrication plants (fabs) invest in added equipment to get up and running to meet the demand.

Tailwinds for Lam Research

Lam Research's equipment creates chips for computing devices, mobile phones, automobiles, and other products. Thanks to technologies such as artificial intelligence (AI), which demands exponentially more computing power, manufacturers will need more equipment from Lam and its peers.

Moreover, around two-thirds of all third-party chip manufacturing takes place in Taiwan. Due to geopolitical concerns over China, governments across the developed world have offered subsidies to chip manufacturers to build more fabs in the U.S. and Europe. That serves as another catalyst.

Admittedly, companies wanting to build the most advanced chips depend on the EUV technology dominated by ASML. However, investors may forget that much of the world depends on less advanced chips.

Also, companies can produce memory or embedded chips without EUV machines. Thus, Lam Research enjoys a fruitful relationship with top customers such as Samsung, Micron, Intel, and TSMC.

Additionally, Lam Research reported about $11 billion in systems revenue in the first half of 2023 alone. More sales mean more customers spend on maintenance, a category responsible for close to $7 billion in revenue, about 39% of the company's revenue over the same period.

Understanding Lam Research's financials

Still, recent financials point more to an industry slump than a bright future. At the end of fiscal 2023 (ended June 25), Lam's revenue of more than $17 billion increased by only 1% over the last year. With both its cost of goods sold and operating expenses rising at a higher rate, Lam's fiscal 2023 net income of $4.5 billion, or $33.21 per diluted share, fell 2%. Analysts believe net income will fall to a consensus $26.82 per share next year.

However, in 2025 and 2026, they also forecast a consensus net income of $33.75 per share and $39.52 per share, respectively. These estimates hinge on an expectation that the industry's cyclical slump will end and manufacturers will resume fab development.

After the recent rise in the semiconductor stock's price, the price-to-earnings ratio (P/E) stands at around 19. This is close to its average for the last five years. However, with a building spree in the chip industry, the company holds considerable potential for multiple expansion, especially considering rival ASML's P/E ratio of 30.

Should I consider Lam Research?

Ultimately, investors may want to consider adding shares of Lam Research. With the stock up nearly 50% this year, now isn't the time for an all-in purchase. Also, the expected drop in earnings next year could put near-term pressure on the stock.

In the end, however, manufacturers will need more equipment in the coming years. Those sales and the higher spending on maintenance play into the hands of Lam Research. Such factors should drive revenue and stock prices higher over the next few years.