This LRCX Stock Forecast article was written by Meiru Zhong – Financial Analyst at I Know First.

Highlights

• The decreased sales of wafer fabrication equipment (WFE) were mainly driven by the weakened customer demand, especially in the memory market, and trade restrictions on sales of specific products and services to China.
• By the end of the December quarter of 2023, LRCX earned a total revenue of $3.76 billion, reduced by 28. 8%. Its system revenue dropped by 35.2% and customer support-related revenue decreased by 15.7% compared with the last December quarter.
• The company differentiates products and services by focusing on multiple available market expansion opportunities and gets closer to customers by processing development capabilities near customers and manufacturing, including the Malaysia facility.
• Lam Research has outperformed and remained resilient in spite of the slowing economy, as the revenue growth rate is almost double the growth rate expected by the World Semiconductor Trade Statistics.
• DCF Values LRCX at $1,023, an upside potential of 8% compared with the stock price of $949.08 on March 20, 2024.

Overview

Lam Research Corporation (“LRCX”) is a U.S. supplier of wafer fabrication equipment and services to the semiconductor industry. Its competing products and services are used in a range of electronic products, including mobile phones, personal computers, servers, wearables, automobiles, and data storage devices. Founded in 1980 by David K. Lam and headquartered in Fremont, California, the company was the second-largest manufacturer in the Bay Area as of 2018, followed by Tesla. As of the end of 2023, Lam Research earned a revenue of US$17.4 billion and spent US$1.7 billion on R&D, with an operating margin of 29.7%. The company’s current fiscal year will end June 30, 2024, and include 53 weeks.

Navigating Challenges and Expanding Horizons

Lam Research operates exclusively in the manufacturing and servicing of wafer fabrication equipment. Its revenue can be categorized into two main segments: system and customer support-related revenue. Specifically, systems revenue includes sales of equipment in deposition, etch, and clean markets, while customer support-related revenue includes sales of customer service, spares, upgrades, and non-leading-edge equipment from the company’s product line.

As of the end of the December quarter in 2023, LRCX reported a revenue of $3.76 billion, reflecting a decrease of 28.8% compared to the same period last year. Within this, system revenue dropped by 35.2%, and customer support-related revenue decreased by 15.7% compared to the previous December quarter.

Lam Research serves three primary markets: memory, foundry, and logic/other device manufacturing, and operates in seven geographic regions: the United States, China, Europe, Japan, Korea, Southeast Asia, and Taiwan. The company experienced a decline in performance during the December quarter, primarily due to weakened customer demand and reduced spending for wafer fabrication equipment, particularly in the memory market.

Additionaly, the imposition of trade restrictions by the U.S. government on sales of equipment, parts, and services for specific technologies and customers in China further exacerbated the situation, leading to a contraction in semiconductor demand.

Faced with increasing stress, Lam Research has prioritized investments in its Research and Development department to enhance its product and service mix. Currently, the company is focusing on exploring multiple available market expansion opportunities, such as gate-all-around, backside power delivery, advanced packaging, dry extreme ultraviolet (EUV) patterning, and other innovations. Leveraging technologies like pulsed laser deposition, Lam Research aims to introduce new process capabilities for high-volume manufacturing in specialty markets.

In addition to developing differentiated products and services, the company also pours investments into enhancing processing development capabilities near customers and manufacturing facilities, including operations in Malaysia. These efforts are aimed at significantly increasing the percentage of revenue derived from lower-cost manufacturing locations, compared to previous years.

Double-digit Rebound Expected in 2024

Taking a broader perspective, Lam Research operates within the cyclical semiconductor industry, where performance tends to fluctuate considerably in line with industry cycles. While the company’s revenue generally shows an upward trend, its annual revenue growth rate has declined from 45.6% in 2021 to 17.8% in 2022, and further to 1.2% in 2023. Initially, these numbers might raise concerns and lead to questioning of LRCX’s management and performance. However, upon deeper analysis of industry developments, it becomes apparent how well Lam Research has performed relative to its peers.

The World Semiconductor Trade Statistics (WSTS) releases its semiconductor market forecasts annually in November, providing insight into its expectations for the current year and the following year. Looking back at its forecasts, the institution predicted strong growth of 26.2% in 2021, followed by flat growth of 4.4% in 2022, a contraction of 9.4% in 2023, and an estimated growth of 13.1% in 2024.

When compared to WSTS’s forecasts, Lam Research’s performance stands out as it has consistently outperformed expectations and demonstrated resilience in the face of challenges such as a slowing economy, supply chain disruptions, and inflationary pressures.

In 2023, the global wafer fabrication equipment (WFE) market was valued at approximately low $80 billion. Specifically, the memory market experienced a significant decline of nearly 40% year-over-year, while the non-memory market saw a drop in the mid-single digits. However, projections indicate a reversal of this downturn in 2024, with the WFE market expected to increase to the mid-high $80 billion range.

• DRAM: Growth is expected to be driven by capacity additions in high bandwidth memory and node conversions.
• NAND: Growth is anticipated to be driven by technology advances.
• Foundry/logic: Growth will be led by leading-edge investments, partially offset by declines in mature nodes outside of China.
• China: Domestic spending is anticipated to remain stable.

Given Lam Research’s strong performance, it is reasonable to assume that its revenue growth rate will be in the double digits, ranging from 28% to 33%.

Strategic Restructuring Plan and Share Repurchase

In response to the challenges faced during the exogenous ordeal, Lam Research initiated a restructuring plan in the March quarter of 2023 to manage its costs. As part of this plan, the company made the decision to terminate a portion of its workforce, resulting in charges totaling approximately $107.1 million in the second half of fiscal year 2023 and $7.3 million in the first half of fiscal year 2024. Despite these difficulties, Lam Research remained optimistic about its future prospects.

Motivated by this positive outlook, the Board of Directors authorized Lam Research to repurchase up to $5.0 billion of common stock in May 2022. By the end of 2023, the company still had around $2.07 billion of common stock available under the repurchase program. In addition to the repurchase plan, Lam Research acquired an additional 15,000 shares at a total cost of $10.0 million during the six months ended December 2023. This strategic move demonstrates Lam Research’s commitment to maximizing shareholder value and confidence in its long-term success.

DCF Estimates $1,023 LRCX Stock Forecast

The DCF analysis shows that LRCX’s intrinsic, 1-year, and 2-year stock price should be around $1,023, $1,150, and $1,251 respectively, which is 8%, 21%, and 32% upside potential from the price of $949.08 on March 20, 2024. It’s clear that the LRCX stock price is undervalued and is worth buying.

The DCF model is built based on the following assumptions:

• The risk-free rate is 4.1% according to the US 10-year zero coupon bond in March of 2025. The risk premium 5.5% comes from the average market risk premium in the U.S. from Statista.
• Beta 1.52 is calculated based on the slope of the change of monthly LRCX stock price and S&P500 price from 2018 to 2024.
• The cost of debt is calculated as a weighted average interest expense of 3.2%.
• The tax rate is the effective tax rate 11.7% derived from the 10-K 2023.
• The terminal growth rate is assumed at 4.5%.

Due to the uncertainties in the macroeconomic environment, it is difficult to accurately predict the impact of relevant risk factors such as epidemics and wars, and the assumption may not be valid. A sensitivity matrix is created to show the impacts on LRCX’s intrinsic stock price by altering WACC (weighted average cost of capital) and terminal growth rate.

Conclusion

I have taken a buy-side position on LRCX stock because the discounted cash flow (DCF) target price indicates a potential upside of 8% from the current price, with a target price of $1,023. Despite the presence of risky and unstable macroeconomic factors that could negatively impact the company’s business operations, Lam Research is poised for a rebound in revenue growth rate, expected to return to double digits due to the prosperous memory market in 2024. In the long run, I am confident that the increasing demand for semiconductors will drive sustainable growth, leading to a higher stock price for LRCX in the coming years.

It is worth paying attention that the stock-picking AI of I Know First has a high signal on the one-year market trend forecasts, supporting my position for the LRCX stock forecast. The light green for the short-term forecasts is mildly bullish, while the darker green is a strong bullish signal for the one-year forecast.

Past Success with LRCX Stock Forecast

I Know First has been bullish on the LRCX stock forecast in the past. On March 20^th, 2023 the I Know First algorithm issued a forecast for LRCX stock price and recommended LRCX as one of the best computer industry stocks to buy. The AI-driven LRCX stock prediction was successful on a 1-year time horizon resulting in more than 88.69%.

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Please note-for trading decisions use the most recent forecast.