Wall Street primarily focuses on Nvidia and Broadcom as key enablers of the artificial intelligence (AI) revolution. While the role of graphics processing units (GPUs) and custom accelerators in the global AI build-out is indisputable, equally important are the manufacturing tools and equipment needed to make these processors possible.
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Lam Research (LRCX +1.19%) is one of the pick-and-shovel companies that develops these tools -- highly precise etching and deposition equipment (used for precise pattern shaping and accurate metal layering on the silicon wafer) used to manufacture the smallest and most advanced semiconductor chips.
These tools are essential for manufacturing cutting-edge chips at 3 nanometers and below where traditional extreme ultraviolet (EUV) lithography alone falls short on precision and throughput. The company is also a prominent player in gate-all-around (GAA) transistors and advanced packaging -- critical technologies that are crucial for manufacturing faster and more efficient AI chips.
In its latest period (fourth quarter of fiscal 2025, ended June 29), Lam's revenue was up 33.6% year over year to $5.2 billion, while gross margins were a record 50.3%. This highlights the strong demand and robust execution from the company. The company is also committed to returning capital to shareholders, having paid $1.3 billion in buybacks and $295 million in dividends during Q4.
Lam Research's shares have soared nearly 78% so far in 2025. Yet, here's why it is still a very attractive pick in 2025.
NASDAQ: LRCX
Key Data Points
Market opportunity
Global wafer-fabrication equipment (WFE) spending is expected to reach approximately $105 billion in 2025, up from the previous estimate of $100 billion, primarily due to increased investment in China. Lam Research is well positioned to capture a significant share of this market since AI chips require smaller transistors, denser memory, and more advanced packaging -- all of which increase the need for Lam's etch and deposition equipment.
The company expects its serviceable available market (SAM) to reach the mid-30% range of the WFE market in 2025, with potential to reach the high-30% range of WFE. Long term, the company expects to capture almost half of the incremental SAM.
Competitive edge
Besides its etching and deposition equipment, Lam Research also offers multistation plasma processing (which etches metal layers across multiple silicon wafers at once), thus helping foundries and Integrated Device Manufacturers (a chip company that both designs and manufactures in-house) to boost efficiency and yield.
The company's atomic layer deposition (ALD) metallization tools using molybdenum are mainly used for GAA transistors -- used in the smallest nodes, typically 3 nanometers and below -- to better control electricity consumption and make chips faster and more power efficient.
Advanced packaging
Lam Research is also seeing rapid growth in advanced packaging, which is critical for improving memory density, bandwidth, and power efficiency in GPUs, central processing units (CPUs), AI accelerators, and memory chips used in data centers. The rapid adoption of AI is driving demand, with leading customers spending over six times more on advanced packaging than they did in 2021.
With its SABRE 3D packaging tool and decades of copper-plating experience (needed for advanced packaging), Lam Research is capturing new opportunities in the high-volume AI and data center chips.
Valuation
Lam Research's future earnings estimates and current valuation highlight the stock's upside potential. The stock is trading at around 29 times forward earnings. Analysts expect the company's earnings per share (EPS) to be $4.48 in fiscal 2026 (ending June 30, 2026) and $5.20 in fiscal 2027.
We can expect its forward price-to-earnings (P/E) multiple to gradually expand in the range of 30 to 35, in line with high-growth AI-powered semiconductor players, especially as demand for advanced node chips continues to surge. This implies that the company's share price could fall within the range of $156 to $182 by 2027, representing an increase of nearly 21.7% to 42% over its closing price as of Sept. 26.
Even though the share price gains are not massive, they are sufficiently high, especially when you get a stake in a company with a stable business model and cutting-edge technologies. The stock can go even higher in the next decade, as AI chip manufacturing further picks up momentum. Hence, it makes sense to buy at least a small stake in this high-quality semiconductor stock in 2025.
