Shares of Lam Research (NASDAQ:LRCX | LRCX Price Prediction) are rallying back rapidly after a pretty terrifying moment that saw nearly 42% of its value wiped out in just over a month. Since bottoming out along with the rest of the semiconductor plays, the stock is now up close to 34%. And it feels like just a matter of time before new highs are hit.
Of course, it’s been about more than just the broader relief rally in the semis that’s helped Lam Research stock melt up in a V-shaped fashion. The semi equipment maker has plans to boost its R&D lab budget by $3 billion in the next five years, a move that should help the firm stay at the cutting edge while widening its already impressive economic moat.
With a strong quarterly beat in the books, upbeat guidance, and continued strength from Lam’s top customers, which are probably going to start expanding capacity more aggressively, the stage certainly does look set for another breakout moment.
In the right place for the AI revolution
It’s not just the favorable environment ahead as the AI revolution enters its next inning, but Lam Research’s ability to steer the semiconductor plays towards the next generation of manufacturing. Indeed, the company would probably still be riding higher, even if it hadn’t committed $3 billion more to its lab to spark breakthroughs on the etching side of things.
Any way you look at it, complex tools needed to make cutting-edge chips could really kick into high gear, as the broad basket of manufacturers start investing excess cash hoards towards the latest and greatest equipment. As next-generation chips go to smaller processes while going 3D, a new kind of etch process is going to be needed.
Whether that pushes the bottleneck towards Lam Research remains the big question. As atomic layer etching (ALE) looks to become the new norm, questions linger as to whether Lam Research is the way to play a potential supercycle well ahead of time.
It’s hard to tell, but either way, if Lam has the technology, it can dictate the price. And with the profitability of Lam’s customers going through the roof, there’s certainly enough capital that can flow the firm’s way as it looks to etch out an even deeper moat for itself in the coming five years.
Explosive momentum and the wind at Lam Research’s back
Whether investors are looking to play a multi-year foundry ramp or the next generation of etching, I think Lam Research is very well positioned to keep accelerating its revenues from here. Oppenheimer’s technical team went as far as to praise shares of Lam Research as one of its “best of the best” names on a momentum screen.
There’s a lot of heat riding behind the name, but at 33.2 times forward price-to-earnings (P/E) multiple, I still don’t think you can call Lam Research an expensive stock, especially when you consider the stage that’s been set and the potential earnings power to be had as the etching titan beckons in the next era for the semiconductors, one that’s taking on a new dimension.
Of course, there’s execution risk that comes with the name, given the increased complexity that comes with the shrinking process and the precision of ALE needed for the next era of 3D chips. While I’m a fan of the long-term roadmap, I’d much rather wait for a near-term pullback as explosive momentum exhausts itself. Semiconductor sell-offs aren’t going to be easy to buy, but when the time does come, Lam Research stock is bound to face amplified momentum when things turn lower as well.
Betting on a breakthrough
Upped R&D spend ought to increase the odds of a technical breakthrough that may very well have broad implications for the broader semi scene. Lam Research isn’t just a background play supporting the semi makers anymore; it’s a vital innovator that’s keeping things at the bleeding edge of innovation. As orders come in and a supercycle kicks off, perhaps Lam Research could prove to be one of the timelier names as semis heat up again.
At the end of the day, whenever we enter a new era of chipmaking, Lam and the equipment makers are the firms that get paid first.
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