Where Will Lam Research Stock Be in 1 Year?

Lam Research's (LRCX 2.65%) stock dipped 4% during after hours trading on Oct. 18 following the semiconductor equipment manufacturer's release of its latest earnings report. For the first quarter of fiscal 2024, which ended Sept. 24, the company's revenue declined 31% year over year to $3.48 billion, but beat the consensus forecast by $60 million.

Its adjusted EPS dropped 34% to $6.85, but also exceeded analysts' estimates by $0.72.

Lam cleared Wall Street's low bar, but its growth is still being throttled by the cyclical slowdown of the semiconductor market. However, Lam's stock has also more than doubled over the past 12 months as investors looked toward its eventual recovery.

Will its business stabilize over the following year and drive its stock even higher?

Image source: Getty Images.

How fast is Lam Research growing?

Lam Research is one of the world's largest producers of wafer fabrication equipment (WFE), which is used to manufacture a wide range of semiconductors. In fiscal 2023 it generated 42% of its revenue from memory chipmakers, 38% from foundry customers, and the remaining 20% from logic chipmakers and integrated device manufacturers.

Lam generated 84% of its revenue in Asia during the year. Its largest market is China (supplying 26% of the company's revenue), followed by South Korea (20%) and Taiwan (20%). 

It also generated 32% of its revenue from its largest customer, which it didn't name in its latest 10-K report. However, it listed Intel, Kioxia, Micron, Samsung, and TSMC as its "most significant customers."

All of those chipmakers suffered slowdowns over the past year as sales of PCs cooled in a post-pandemic market, the 5G upgrade cycle for smartphones ended, and U.S. regulators curbed exports of shipments of advanced semiconductors to China. Rising interest rates, supply chain issues, and other macro headwinds exacerbated that pressure.

That's why Lam's revenue grew at its slowest rate in four years in fiscal 2023 as its gross margin shrank and its EPS growth slowed to a crawl. That slowdown dragged on into the first quarter of fiscal 2024.

Data source: Lam Research. GAAP basis. YOY = Year-over-year.

Lam expects its revenue to decline about 30% year over year in the second quarter of fiscal 2024. It mainly blames that slowdown on the market's sluggish demand for NAND memory chips.

But on the bright side, Lam doesn't expect the U.S. export curbs against China -- which took a $2 billion bite out of its top line in fiscal 2023 -- to keep throttling its growth in fiscal 2024. Instead, it expects Chinese chipmakers to shift their spending toward other equipment for the production of non-restricted semiconductors.

Stable gross margins but wobbly operating margins

A favorable mix of customers also boosted Lam's gross margin sequentially and year over year in the first quarter. It expects that year-over-year expansion to continue in the second quarter, which implies the company still has plenty of pricing power in the WFE market.

However, Lam's operating margin fell sequentially and year over year in the first quarter, and it expects another year-over-year contraction in the second quarter as it ramps up its R&D spending. It expects its EPS to drop 37% year over year in the second quarter on a generally accepted accounting principles (GAAP) basis and 35% a non-GAAP basis.

During the conference call, CEO Tim Archer said that while it "remains hard to call the timing and pace of WFE recovery," he believes Lam is "in a good position to benefit from both cyclical and structural drivers of demand."

The company didn't provide a full-year outlook, but analysts expect its its revenue and earnings to decline 16% and 19%, respectively, in fiscal 2024. But for fiscal 2025, it expects revenue and earnings to grow 19% and 29%, respectively, as the cyclical slowdown finally ends.

Where will Lam Research's stock be in a year?

Lam's stock trades at a reasonable 24 times forward earnings, and the company remains committed to returning most of its free cash flow (FCF) to investors through dividends and buybacks. It's already bought back about 15% of its shares over the past five years, and it plans to keep buying back more shares through its cyclical downturn.

In other words, Lam's downside should be limited as investors await more signs of a cyclical recovery. I'm not sure if it will outperform the broader market over the next 12 months, since a lot of that recovery has already been baked into its valuations, but it could gradually climb higher as more green shoots appear across the semiconductor market.