Table of Contents
- Company profile LAM Research - Machines for semiconductor production
- The latest quarterly figures from LAM Research April 2024
- LAM Research share forecast 2024
- Key figures of the LAM Research share from the Levermann analysis
- LAM Research share valuation
- Conclusion on the LAM Research share
In the gold rush of the 19th century in the west of the USA, shovel salesmen in particular earned a lot of money. This situation has not changed since then and the LAM Research share is benefiting.
Currently, in the age of artificial intelligence, many companies are in a kind of gold rush in search of the best AI products. The semiconductor industry has been experiencing high demand ever since. In the semiconductor industry, manufacturers of the machines required for production are particularly in demand. Without these machine manufacturers, the production of the best AI chips would not be possible. One of the largest manufacturers of machines for semiconductor production is LAM Research (ISIN: US5128071082).
The LAM Research share has given investors a lot of pleasure in the last 10 years and has increased more than fifteenfold.
This fantastic performance does not yet include the dividends received. LAM Research has also been paying increasing dividends every year since 2014.
From a dividend of 0.18 dollars per share in 2014, the dividend was increased to 8.00 dollars per share this year.
For these reasons, we would now like to take a closer look at the LAM Research share in the following share analysis.
The most important facts in brief
- Manufacturer of machines for the semiconductor production cycle
- High valuation of the LAM Research share
- High dividend growth
- Oligopoly market together with Applied Materials
Company profile LAM Research - machines for the semiconductor production cycle
LAM Research is an American company headquartered in Fremont, California (USA). The company specializes in the development, construction and sale of highly complex machines for semiconductor production.
LAM's equipment can be used for the production of all microchips. LAM divides this into data storage (Memory), production (Foundry) or intelligence (Logic).
LAM Research generated 80 percent of its revenue with devices for production in the memory segment (42 percent) and in the foundry segment (38 percent). Only 20 percent is attributable to the logic segment.
LAM's customers are global semiconductor manufacturing companies. These include TSMC and Samsung, among others.
This is also reflected in the geographical sales mix for 2023.
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The most important market for LAM is China, which accounts for more than a quarter of sales. Korea and Taiwan each account for 20 percent, followed by Japan with 10 percent. It is striking that the USA only accounts for 9% of sales. Europe only accounts for 7 percent. On the positive side, the share with Europe and the USA has been increasing since 2021.
It is also striking that China's share is declining. In 2021, this was still at 35%. Korea's share is also declining. This was still at 27% in 2021. The share of sales with Taiwan has increased. After 14% in 2021, it is now 20%.
Interim conclusion: The geographical sales mix was better diversified last year than in 2021. In 2021, LAM Research generated almost two thirds of its sales with China and Korea. This share has fallen to 46 percent. Taiwan has now become correspondingly more important. A certain China risk can nevertheless be recognized, as China accounts for more than a quarter of sales and the geopolitical tensions between the US and China are part of the global news almost daily.
LAM Research in the semiconductor production cycle
In order to better understand the products of LAM Research and their significance for chip manufacturers, let's take a brief look at the stages in which a semiconductor is produced.
Here is a diagram from ASML's annual report.
- Round disks of silicon, known as wafers, are coated with various metal alloys, e.g. silicon oxide.
- This is followed by the application of a light-resistant coating layer.
- The wafer is exposed to light through a selected mask. Where the light hits the wafer, the lacquer layer dissolves and a pattern is created on the wafer. ASML manufactures the lithography systems required for this process.
- The wafer is then baked to solidify the structures developed in step 3. In addition, unnecessary areas on the wafer are removed using an etching process. This process can be achieved by using gases. This gives the wafer its 3D structure.
- Ion implantation makes the wafer electrically conductive. To do this, the wafer is bombarded with positive and negative ions.
- In the final step, superfluous materials are removed from the wafer. The wafer is then tested and packaged.
We now know how a semiconductor is manufactured. In which steps are the machines from LAM Research used?
These are the areas of deposition (coating), etching (etching) and clean (cleaning).
According to the list of process steps for a wafer, LAM Research builds machines for steps 1, 4 and 6.
LAMResearch also offers different types of equipment for each process step.
Depending on the design and subsequent application of the semiconductor, different types of metal films are placed on the wafer. For this reason, LAM also offers 6 different devices for this stage of production under the Deposition segment.
In the Etch segment, there are 5 devices for different etching processes, ranging from radioactive to highly radioactive.
Clean (cleaning) also contains 5 different types of machines, which are divided into wet cleaning and plasma cleaning (dry cleaning).
After looking at the business model, we can conclude that the company offers a broad product portfolio for various production processes in semiconductor manufacturing. Unfortunately, the company does not state how sales are distributed across the individual device types. However, we have identified a decreasing geographical dependence on China.
The latest quarterly figures from LAM Research April 2024
The recently reported quarterly figures from LAM Research are interesting from several perspectives.
Firstly, we see a decline in turnover of 2% to 3.97 billion dollars. However, thanks to good cost management, LAM was able to increase gross profit by 9%, resulting in a corresponding increase in the gross margin. However, as both general administration costs and research and development expenses rose sharply, EBIT still amounted to 1.09 billion dollars. This corresponds to an increase of only 4 percent compared to the previous year.
After deducting taxes and interest, LAM achieved a net profit of 966 million dollars, an increase of 19% compared to the same quarter in 2023.
How do we classify these figures?
Demand for LAM Research 's devices may have fallen despite global AI hype and high demand for Nvidia 's expensive GPUs, as sales are down year-on-year. At the same time, LAM is significantly increasing its spending on research and development, which suggests that the company still has some catching up to do to create the highest quality AI GPUs.
LAM Research share forecast 2024
Having looked at LAM Research 's latest quarterly figures, let's now take a look at the analysts' estimates for the current year.
After the unexciting quarterly figures, analysts are also cautious with their estimates for the year as a whole.
On average, turnover of just 14.86 billion dollars is expected. This would mean a decline of almost 15 percent compared to 2023. However, the net margin is expected to increase to over 25%.
However, expectations for the following years are different.
For 2025, analysts estimate that turnover will return to 17.6 billion. Turnover is only expected to increase significantly in 2026 and beyond, with growth rates in the mid to high double-digit range.
On the profit side, analysts expect a significant increase in the net margin over the next few years. This is currently below 25% and is expected to increase to over 28% by 2026.
Conclusion: Nobody can predict precisely how the increase in demand for AI products will develop. Let's remember: the Logic division only accounts for 20% of LAM 's current turnover. The “bread-and-butter business” is therefore still to be seen in the foundry and memory areas.
Without correspondingly high demand in the Memory and Foundry segments, LAM Research would have to record very strong growth in the Logic segment in order to achieve the high growth rates forecast by analysts. However, it is quite possible that LAM will achieve higher margins with its products.
Key figures for the LAM Research share from the Levermann analysis
According to the Levermann strategy, LAM Research is currently listed as a top scorer share with 4 points. The share has therefore passed the required hurdle of 4 points.
LAM Research receives points primarily for profitability, healthy capital structure and technical factors.
The equity ratio of 43% and the return on equity of around 55% are each awarded one point. These are both very good values, as the thresholds of 25% and 20% respectively are clearly exceeded.
The EBIT margin of 30% is also impressive. Here, 12% would have already earned one point.
It is particularly impressive that the figure has not been below 25% in the last 5 years.
The high share price growth in the last 6 and 12 months earns the share another two points. The same applies to the earnings growth of 20 percent.
The share receives deductions for its valuation. Both the average P/E ratio (price/earnings ratio) in the last 5 years and the P/E ratio in relation to earnings in the current financial year are both over 30. LAM would have had to achieve values below 16 in each case in order not to be deducted points.
LAM Research share valuation
The Levermann analysis already highlights a critical aspect of LAM Research, namely the high valuation of the share.
With a current P/E ratio of 39, the share appears expensively valued. Analysts expect the share to grow into its high valuation thanks to further growth in EPS (earnings per share).
With an average EPS forecast for 2026 of USD 45, the share would no longer look quite so expensive with a P/E ratio of 21. But the company would first have to deliver high earnings growth.
Let's take a look at other valuation parameters.
Let's try the enterprise value/free cash flow ratio (EV/FCF). The current ratio is a factor of 30, which is also a high value.
We also add the Enterprise Value/Sales (EV/Sales). This value is almost 10, which seems very expensive for a machine manufacturer.
By way of classification: according to the High Growth Investing strategy, shares with an EV/Sales ratio of less than 8 receive the full 3 points. This applies to the valuation of software companies without maintenance-prone production facilities and with recurring subscription revenues.
However, as LAM Research operates in an oligopoly market, the share is accorded a higher valuation. We will now take a look at whether this valuation premium also applies to the other company, which manufactures machines for some of the same process steps in semiconductor production.
LAM Research comparison with Applied Materials
LAM's largest competitor is Applied Materials (ISIN US0382221051), which is also based in the USA. Applied Materials also offers equipment for various etching and coating processes. In addition, there are inspection devices for the functionality of wafers and devices for ion implantation.
If we look at the valuation ratios we have just looked at, it is immediately apparent that Applied Materials appears to be more favorably valued. The P/E ratio for AMAT is only 27 and the EV/Sales is 7, so the share is no bargain, but it does not appear to be as highly valued as LAM Research. The EV/FCF for $AMAT is 28, while the LAM share is also valued higher here at 30.
In terms of margins, it is noticeable that the gross margin and EBIT margin are on a par. The values of 47 and 29 respectively are very high values for companies in the mechanical engineering sector and indicate a certain degree of pricing power without much effort for sales and marketing. However, Applied Materials' free cash flow margin of around 26% is still a few percentage points behind LAM's 32%.
Finally, we add the growth rates in order to get a complete picture of both companies in comparison.
We have already seen that LAM Research 's sales growth is declining. In comparison with Applied Materials, it is clear that the main competitor's products currently appear to be in greater demand. This is because turnover at AMAT remained almost the same compared to the previous year, while LAM had to cope with a decline of 24%. This is even clearer when it comes to EBIT. While LAM's EBIT fell by a full 31 percent, the roughly one percent decline at Applied Materials looks like a significant gain in market share.
After additional consideration of the Applied Materials share, LAM Research still appears to be highly valued, as the share not only has higher parameters such as the P/E ratio, but also appears to be losing market share to the competition, as the latter recorded significantly lower declines in sales and EBIT.
Conclusion on the LAM Research share
Following our analysis, we can conclude that LAM Research is a quality company.
The market position and the associated pricing power, the high dividend growth and the advantage that semiconductors could experience even higher demand in the future speak in favor of LAM.
The number of shares outstanding has also fallen significantly in recent years.
Over the last 6 years, LAM Research has bought back 20 percent of the outstanding shares.
For these reasons, the majority of analysts also see the share as a buy.
Although a small majority see the share as a buy, the average price target is only 5 percent above the current price target of 962 dollars.
On the downside, we have to note that Applied Materials currently seems to be gaining market share against LAM Research and also appears to be more favorably valued.
At the current level, LAM Research shares do not appear to be a buy. This could change if the share price falls below 700 dollars. The P/E ratio would then be around 20 based on the expected earnings per share in 2025, and the share could then be re-analyzed.
For this reason, setting a P/E ratio alert at 20 could make sense for interested investors.
