Excitement over artificial intelligence (AI) has helped lift technology stocks in 2023, sending the Nasdaq-100 index soaring 39% so far this year, but the sector has lost some steam of late for several reasons.
Still-high Treasury yields and weaker-than-expected earnings reports from certain big tech companies have halted the Nasdaq index's terrific rise. The U.S. Commerce Department's restrictions on sales of AI chips to China has turned out to be another headwind for tech stocks. All this explains why the Nasdaq-100 is down over 3% in the past three months.
The negative sentiment has also weighed on Lam Research (LRCX 2.65%). Shares of the semiconductor manufacturing equipment maker are down 9% in the past three months. Of course, the stock is still up 50% year to date, but could its recent weakness be an opportunity?
Let's look at why buying Lam Research stock right now could turn out to be a smart move.
Lam can take advantage of a fast-growing opportunity
Lam Research stock fell following the release of the company's fiscal 2024 first-quarter results (for the three months ended Sept. 24). However, a closer look at the company's performance indicates that investors may be missing the bigger picture.
The company reported revenue of $3.5 billion for the quarter, which was well below the $5 billion figure it reported in the year-ago quarter. This massive year-over-year drop can be attributed to the sharp decline in spending on memory manufacturing equipment this year.
Lam gets 38% of its revenue from selling semiconductor manufacturing equipment to memory manufacturers. With memory equipment spending anticipated to drop a steep 46% in 2023, it is not surprising to see Lam's financial performance taking a hit. But the good news is that memory spending is expected to come back strongly in 2024, increasing a whopping 65%.
One of the key reasons behind this strong jump in memory spending next year is growing demand for high-bandwidth memory (HBM), which is deployed in AI servers. Memory manufacturer SK Hynix estimates that the HBM market could grow at an eye-popping annual rate of 82% through 2027. That's not surprising, as Hynix estimates that an AI server needs at least 500 gigabytes (GB) of HBM and at least 2 terabytes (TB) of DDR5 dynamic random access memory (DRAM).
In addition, AI chip manufacturers have started packing large amounts of HBM into their offerings. Nvidia, for instance, recently announced a new chip -- the GH200 -- that combines a central processing unit (CPU) and a graphics processing unit (GPU) on a single platform. This dual configuration carries 3.5 times more memory capacity and 3 times more bandwidth compared to Nvidia's flagship H100 data center GPU.
More specifically, the GH200 is equipped with 282 GB of the latest generation of HBM, while the usual H100 comes with 80 GB. Meanwhile, Nvidia's rival AMD will reportedly put a massive 1.5 TB of third-generation HBM into its Instinct MI300 data center accelerators.
These are all reasons why Lam Research is now anticipating a recovery in semiconductor equipment spending this year. Earlier, the company was forecasting wafer and fabrication equipment spending to hover around mid-$70 billion in 2023, but it now expects that figure to move into the $80 billion range thanks to HBM-related demand.
In all, a pickup in memory spending next year should give Lam Research a much-needed boost, helping it come out of the rut it is in right now.
Better financial performance could be in the cards
Lam Research expects fiscal Q2 revenue to land at $3.7 billion at the midpoint of its guidance range. While that would be a 30% year-over-year decline from the $5.3 billion revenue it generated in the December quarter of 2022, it also points toward a 6% sequential improvement in its top line.
For the full year, analysts are anticipating Lam's revenue to drop 20% to $13.9 billion. However, the company's top line is expected to start growing once again from next year.
LRCX Revenue Estimates for Next Fiscal Year data by YCharts
This means if Lam Research stock continues to head lower following its recent earnings report, savvy investors may want to start accumulating it, as it is likely to become cheaper from a valuation perspective. Lam stock currently sports a price-to-sales ratio of 5.3, which is almost in line with its five-year average sales multiple of 4.5.
If the stock becomes cheaper, buying it could be a no-brainer, considering that it is expected to step on the gas thanks to the recovering memory market and the growing demand for HBM being driven by the adoption of AI.
