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Lam Research: AI, IoT, 5G, And Gaming Tailwinds

Mar. 08, 2021 10:13 AM ETLam Research Corporation (LRCX)13 Comments
OmniScience Capital profile picture
OmniScience Capital


  • The Wafer Fabrication Equipment [WFE] market is growing from $57-59 billion in 2020 to $67-$70 billion in 2021 itself as opposed to earlier expectations of achieving this in CY2023/CY2024.
  • By 2024, Lam Research is targeting to increase market share from 20% to 25%; i.e. revenue of $14-$17 billion and FCF of $4-$5 billion.
  • Enterprise value of $78 billion and past FCF of $2.4 billion give an FCF yield of 3%, while the targeted FCF of $4-5 billion could yield 5% to 6.4%.
  • Even the past decade's 6-7% industry growth puts it into double-digit total returns. Lam Research has grown at twice the rate of the industry in the past decade. With Cloud, AI, IoT and 5G coming together, future growth rates could be much higher for the industry and for Lam.
  • This is a cyclical business with a secular growth tailwind. The FCF and revenues, and thus, share price will go through volatility.

Wafer Fabrication Equipment Industry In Growth Mode

Artificial Intelligence [AI], Internet of Things [IoT], and 5G are driving demand for memory and processor chips. This demand is getting pushed upstream towards Wafer Fabrication Equipment [WFE] capital investments by the semiconductor manufacturers in anticipation of future demand for chips. Lam Research (LRCX) being one of the top 3 wafer fab equipment [WFE] manufacturers directly gains from this WFE capex.

The WFE market was averaging annual revenues of $30 billion during 2010-2016. During 2017-2020 it was averaging around $50 billion. From 2021 to 2024 it is expected to average around $60-$70 billion. This a cyclical industry and there is a cadence to capital investments which makes it more relevant to have a moving average perspective rather than a year-on-year growth perspective.

Over a 10-year period the revenues have nearly doubled, making the long-term growth in the 6-7% range. However, driven by the secular growth in movement to the Cloud supported by 5G, Internet of Things [IoT] and ultimately the need for using Artificial Intelligence [AI] for business, the future growth rates are likely to be much higher.

Lam Research is a key player in the WFE industry

Lam Research is one of the top 3 players in the industry with nearly 20% market share. It targets to grow that to nearly 25% market share by CY2023-CY2024.

Lam Research serves 3 main markets, viz. Memory, Foundry and Logic/integrated device manufacturing [IDM]. Memory is the largest revenue contributor with 60%-70%, followed by Foundry with 20%-30%, with Logic/IDM contributing the rest.Lam Research Revenue Segments

Source: Company 10-K (FY2020) and investor presentation (Dec. Q2020)

Geographically, recent data shows that China contributes 30%-35% to company revenues, with Korea contributing 20-24%, followed by Taiwan at 17%-19%, Japan at 9%-10%, USA at 4%-8%, South East Asia 6%-10% and Europe at 3%.

Lam Research Geographic Revenue Source: Company

This article was written by

OmniScience Capital profile picture
OmniInsight: “Most market participants chase alpha but get risks, while one could chase safety and get alpha"Enhance Safety, Enhance ReturnsOmniScience Capital is a global investment management firm focused on global equity investments empowered by its proprietary Scientific Investing philosophy. Scientific Investing creates a SuperNormal Portfolio designed to survive and thrive through uncertainties, delivering optimal “Return on Safety".  It is based on a deep immersive research and analysis of 100+ years of investment management history combined with experience of investing over multiple cycles across different markets. OmniInsight emerged from the above research and is at the crux of the Scientific Investing Philosophy and the resulting framework. It builds upon ideas and insights from before Benjamin Graham to John Burr Williams to Warren Buffett, Peter Lynch and several others.In brief, the Scientific Investing Framework selects SuperNormal Companies at SuperNormal Prices creating a SuperNormal Portfolio.  It is founded by a team who are alumni of Columbia University and other premier Indian and French Institutes, such as IITs/IIMs (India) and EdHec/Toulous (France). Disclosure & Disclaimer: OmniScience Capital is a SEBI-Registered Investment Adviser. SEBI is Securities and Exchange Board of India. OmniScience is NOT registered with the SEC, US as a Registered Investment Adviser; as such, OmniScience Capital is not an investment adviser in the US.Any write-up, about any company or sector or market is a sharing of general opinion and is not to be considered specific advise or buy/sell or hold recommendation. We or our clients we advise might have holdings or positions in the stocks or securities mentioned. Please do your own due diligence on securities before buying or selling. Any mention of historical returns is from a education and research point of view rather than demonstrating a track record. Past returns are no indicator of future returns.

Analyst’s Disclosure: I am/we are long LRCX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (13)

What’s wrong with this stock today ?
Is the chip shortage over ? Geez
OmniScience Capital profile picture
Readers, please go through the article carefully. At OmniScience our focus is to bring interesting ideas that we have come across during our own search to you. Please don't take this as a recommendation or a advice. It is definitely neither recommendation or advice. Please do your own due diligence.
As I mentioned in another comment, you are the buy it side just like us.
As Mark Twain said, prediction is difficult, especially about the future. Sell-side has to predict. Buy-side has to analyse multiple scenarios and see the possibilities and probabilities; that too, subjectively. Bayesian probability has to be used, updating as more factual data appears.
While considering investing in an idea one has to see the downside scenarios first - in the long-term. Short term volatility can take a holding down significantly.

Once long-term downside on a fundamental basis is unlikely to be too bad, one starts looking at upside possibilities.

In this case, there is quarterly guidance and annual discussion on various forums by the management that this year the demand is going to be very strong. This is supported by the narratives from peers. Can they go down in revenue for 2022? That is possible. But clear indication from management that they are likely at a higher base level for the 2021-2024 period. Things have happened much earlier than anticipated.
Please read the whole article carefully. Analyse critically.
I have shared the valuation based on proven financials. Further the upside possibilities based in management outlook and targets.
Risks are laid out. There can be many more. They are well-articulated in the company 10k.
OmniScience Capital profile picture
This is exactly why I love the markets and Seeking Alpha. All the information is laid out in black and white--maybe, some colors too--but still the opportunity will hide in plain sight. Focus is on something else...Mispriced stocks will continue existing in the markets...information availability doesn't cure that...root cause is something else...
Robert Castellano profile picture
@OmniScience Capital In my opinion, this is not something to "focus on something else." A major point of your argument for this stock is that revenues will grow 50% in 2021. I think it is important for readers to find another source of correct information, change the slide, and change your thesis. SA editors readily make corrections on an article. I already gave you a forecast by SEMI, the industry consortium on semiconductor equipment.
OmniScience Capital profile picture
@Robert Castellano N. The major point is that the revenues are expected to average around this over 2021-2024. This information is based on company provided outlook and sector information. Of course, our estimate.
The crux of the thesis is NOT dependent too much on them achieving it this year, which is quite likely though.
The core idea is that for a company in the $14-15 billion revenue range with $3+ billion cash flows annually, it is clearly mispriced.

Throughout I have given multiple scenarios and in most scenarios the return is satisfactory to some people.

Sell side job is to predict accurately. Buy side job is to accept multiple futures and find opportunities in which they can come out with positive outcomes in most of them and no disastrous outcome in all but the most pathological case.

Hope that clarifies. At least that is our framework.
Robert Castellano profile picture
@OmniScience Capital Then change the slide to show 21-24 growth not just 21. It makes you look like a pumper of the stock, and you say you are long on it and why else would you write the article. But don't give erroneous data to pump the stock because because it is disingenuous to other readers who haven't have 36 years analyzing LRCX and others like I have.
Robert Castellano profile picture
Whoa, let me get this straight. Revenues growing 50% in 2021! Who are they buying, because organic growth will get them no where close, particularly since they are so heavy in NAND, and capex spend for that chip and DRAMs will be nowhere near that. Maybe you misread Lam's statement that they have a 50% etch share and interpreted it as a 50% revenue growth. I don't know.
In fact, if I look at Lam's earnings call, CFO Bettinger stated in response to Arcuri of UBS NAND WFE question "Tim, when you look at this, it'll go up, it'll go down, nothing goes up every quarter. It ebbs and it flows and if you go back to '19, it was pretty low. Go to '20, it went up a little bit, '21, flat to up a little bit? Maybe? Yeah, probably."
"Flat to up a little bit" is not 50%. So Lam must be making an acquisition.
Pillpoppinpuppy profile picture
@Robert Castellano FactSet consensus has LRCX rev increasing 46% from 6/20 FY to 6/22 FY. Maybe thinking of that?
Robert Castellano profile picture
@Pillpoppinpuppy First the chart says 2021, not both years. FactSet is wrong. If I use SEMI forecast from Dec 15, 2020, equipment is slated to reach $68.9 billion in 2020, reaching $ 71.9 billion in 2021 and $76.1 billion in 2022 . That makes 4% in 2021 and 6% in 2022. My own analysis is for 2021 to be up 7.5% and another 7.5% in 2022. This is NOT 50% in 1 year.
Pillpoppinpuppy profile picture
@Robert Castellano You picked 50% out of the air, so I was just doing the same. I actually didn't read the article because it looked like one of those articles written in an hour to get paid a few bucks from SA. I was just reading the comments because usually they are more insightful than the doggerel. As far as FactSet, I read it correctly. The actual revenue for FY20 was $10 billion and the FY22 forecast is $14.6 billion, or about 50% :)
author, what is its status in GaN chip development?
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