This Chip Equipment Maker Has More Triple-Digit Upside
Today’s stock is another great pick based on my “picks and shovels” method. This company provides innovative products and services to the fast-growing semiconductor industry, which is gaining immensely from the rise in demand for chips in the consumer electronics space. If the current momentum continues, this stock has the potential to be a multibagger in the coming years.
Lam Research Corporation (NASDAQ:LRCX) is a dominant player in the semiconductor equipment industry. It provides chipmakers with the equipment and services that enable them to make memory and other logic chips for a wide range of electronics like cell phones, computers, tablets, and storage devices.
I am bullish on Lam Research stock for the following reasons.
We live in a digital era when these electronic devices are changing every aspect of our lives. This trend will continue to accelerate in the coming years, with more diverse applications like virtual reality (VR), augmented reality (AR), and connected cars becoming mainstream. This means that more advanced chips need to be churned out by these chipmakers. To do this, they need the equipment and process technologies of an innovative company like Lam Research.
The World Semiconductor Trade Statistics (WSTS) recently released its new semiconductor market forecast. WSTS expects the world semiconductor market to grow to $378.0 billion in 2017 and to $388.0 billion in 2018. For 2017, this represents growth of 11.5%, which is the largest growth year since 2010. (Source: “WSTS Semiconductor Market Forecast Spring 2017,” World Semiconductor Trade Statistics, June 6, 2017.)
The semiconductor market is riding high on the increasing demand for consumer electronic devices like smartphones, hybrid personal computers (PCs), and video game consoles, which in turn will boost growth in the market for semiconductor manufacturing equipment.
Lam Research is in an outstanding position to capitalize on these changing trends. The company’s investments in research and development (R&D) have resulted in it becoming a leading player in its industry, and the growth in LRCX stock reflects this success.
As customers seek to take advantage of the acceleration in innovation in different areas of consumer technology, they will need huge amounts of scaling in performance and power, as well as cost reductions. The demand for more advanced memory and logic chips will continue growing, and this is where Lam Research Corporation’s key products would contribute to the success of its customers.
On the earnings front, the company has been beating all expectations. For the third quarter, Lam Research reported shipments of $2.41 billion, an increase of more than 40% from the average FY16 level; and revenue of $2.15 billion.
Moreover, it reported a strong non- generally accepted accounting principles (GAAP) margin of 46.1% and an operating margin of 26.9%. The non-GAAP diluted earnings-per-share reported were $2.80, which was above the guidance range. (Source: “Lam Research Corporation Reports Financial Results for the Quarter Ended March 26, 2017,” Lam Research Corporation, April 18, 2017.)
The continued strength in numbers has led to Lam Research stock gaining about 46% year-to-date and almost 88% during the past year. It has gone up by more than 300% in the last five years, with more gains expected in the years ahead.
Chart courtesy of StockCharts.com
With a forward price-earnings (P/E) ratio of a little over 14, the valuation is compelling for LRCX stock. As the demand for chips remains high—not only from the developed world, but also from the developing world—the business of Lam Research will be gaining more traction. Expectations are high from the proposed investments in memory-chip factories in China, as well as in other parts of the world, which means that things will get more exciting from the next year onward.
The Bottom Line on LRCX Stock
Lam Research stock is a classic picks-and-shovels play on the growth of chips that are transforming every aspect of our lives. The company is gaining from the rise of smart devices, which is a global phenomenon, and investors could expect a multi-year growth trajectory.
As the demand for chip manufacturing equipment continues to strengthen in the coming years, this stock should bring more gains for its investors.