Lam Research

Lam Research reported great June-quarter results and even better guidance. Sales rose 30% year over year, and September guidance calls for 52% year-over-year growth at the midpoint. Lam also raised its long-term margin targets by 500 to 1000 basis points versus its 2025 investor day targets.

Why it matters: Artificial intelligence infrastructure investments and the resulting chip supply buildout are driving accelerating momentum through calendar 2028. Lam's performance against this backdrop has been phenomenal, and we see it gaining share over immense underlying demand. The margin target raises were a positive surprise, indicating that Lam intends to deploy its pricing power with chipmaker customers, akin to how chipmakers apply pricing to their end customers. We believe Lam can reach 55% gross margin and 44% operating margin in 2029. Lam is outperforming underlying demand and its wide-moat peers, gaining market share. We see this driven by rising etch intensity in advanced packaging across logic chips and high-bandwidth memory, as well as increasing layer counts in NAND.

The bottom line: We raise our fair value estimate for wide-moat Lam to $310 from $220, driven by a stronger medium-term growth forecast and higher long-term margin assumptions. Shares were up 6% after hours but are down more than 30% from a late-June 2026 peak and now look attractive to us. Shares are down in the last month, but the fundamentals are accelerating. We expect supernormal growth for Lam above 30% in the next two years as logic and memory supply gets built out, tapering thereafter. If rapid chip supply growth continues past 2028, there's further upside. Our valuation implies Lam is worth about 20 times calendar 2030 earnings, which aligns with our valuation of a peer like KLA and accounts for the significant growth we expect over the next five years.

Lam matched peer KLA's commentary from the previous day in calling for total wafer fabrication equipment spending to reach the low $150 billion range in 2026. This implies 25% growth from 2025, but we model Lam's growth closer to 40% in calendar 2026. We expect more than 20% growth in 2027 and Lam to outperform again.

Lam's profit margin guidance is well above long-term targets given just a year ago. Gross margin in the "mid-50% range" implies about 500 basis points better than Lam's prior guide of 50%, and operating margin in the "mid-40% range" implies 1000 basis points above Lam's prior guide of 34%-35%. We see both as achievable, with Lam deploying pricing power and benefiting from volume leverage during a period of immense growth.

Our fair value estimate is $310 per share. Our valuation implies a fiscal 2027 adjusted price/ earnings multiple of 32 times and a fiscal 2027 enterprise value/sales multiple of 11 times. Against fiscal 2028 earnings and fiscal 2029 earnings, our valuation implies multiples of 25 times and 21 times, respectively. The greatest drivers of our valuation are strong WFE spending, in particular for leading-edge logic chips for AI, and our belief that Lam can continue to increase its total wafer fabrication equipment market share.

We model a 19% compound annual growth rate for Lam’s sales through fiscal 2031. Through fiscal 2028, we forecast more than 30% growth behind strong cutting-edge logic demand to support generative AI infrastructure. We model this tapering down to midcycle growth in the high-single digits thereafter. We believe short-term growth will be driven by deep supply constraints for AI chips, while midcycle growth will be driven by chipmakers adopting new technologies like advanced packaging, high-bandwidth memory, and new transistor architectures that require more advanced WFE into the long-term. Lam’s system sales are the most cyclically affected, while we expect its services revenue to be much more stable and offset some cyclicality on its top line.

We forecast non-GAAP gross margin of 55% in fiscal 2031, which we see as a strong normalized level for Lam. We think operating margins will move in line with gross margin expansion as Lam continues to spend on R&D, but see some leverage on other operating expenses. We estimate 45% non-GAAP operating margin in fiscal 2031, up from 36% in fiscal 2026, primarily behind volume leverage.

We assign Lam a wide economic moat rating on the basis of intangible assets and switching costs. The company's proficiency in semiconductor deposition and etch results from top-notch design expertise, in our view, and we think its embedded services business and long-term customer road maps are sticky. We also believe the sheer amount of investment required to remain at the forefront of leading chip development creates an immense barrier to entry to all but the largest and best-capitalized chip equipment manufacturers. We expect Lam to earn returns on invested capital well above its cost of capital more likely than not for the next 20 years.

We see Lam holding the most comprehensive portfolio of equipment for semiconductor etch in the world, along with very strong capabilities in deposition. Its product lines run the gamut of chip manufacturing, able to serve logic and memory chipmakers alike with cutting-edge equipment and offerings that span the cost and capability spectrum. Etch makes up about 30% of the WFE market, and Lam controls more than a third of the market, much more than the nearest competitor.

In deposition, Lam's share is second to Applied Materials' but still a strong 20%. Lam’s market shares look better in the larger and higher-value sections of these markets, like dry etch and chemical vapor deposition. To us, these strong share positions are the result of portfolio breadth and depth.

In etch, we see Lam as best of breed, and we see it as highly competitive in deposition, simply with less breadth. Lam excels in memory chipmaking. It is the de facto standard supplier of etch and deposition equipment for memory chipmakers, with the majority of 3D NAND wafers in the world coming through Lam equipment. Its portfolio is fueled by a research and development budget surpassing $2 billion annually. This huge budget dwarfs all but the largest of WFE competitors and enables Lam to continue building its immense base of intangible assets. The strength of Lam’s offerings helps it generate healthy non-GAAP gross margins consistently around 50%.

Lam’s portfolio strength helps it win customers, and we see it embedding in customers once installed. Chipmaking is extremely complicated and precise. As an example, Lam’s etch equipment creates holes on a 3D NAND wafer with a diameter 1/1000th that of a human hair. On every wafer, Lam etches more than 1 trillion of these holes. A given fab can produce more than a million of these wafers per month. Removal and deposition of this precision gets calibrated to specific customer product lines, and chipmakers build workflows around their equipment with the singular goal of efficient production. Lam sends on-site service engineers to customer fabs to operate as an extension of the chipmakers engineering team. These service engineers help to calibrate equipment during R&D, tweak and fix bugs during production, and work with chipmakers on meeting manufacturing requirements. They also work on equipment upgrades or recalibration to repurpose equipment.

The high complexity of Lam’s machines and the integration of its service engineers make it hard to replace, in our view. Beyond the cost of purchasing new equipment ($1 million or more per machine), chipmakers would need to redesign manufacturing workflows and learn wholesale new hardware and software interfaces, as well as restart knowledge sharing with new service engineers. Lam’s equipment can last in the field for multiple decades, which generates deep connections with customer engineering teams and augments this stickiness. Lam’s deep customer relationships also entail forward-looking project road maps up to 10 years out, giving the firm a leg up in winning new placements as it can target new machines to exact customer requirements.

The combination of Lam’s robust portfolio, sticky customer relationships, and large ongoing investment give us confidence in the durability of its competitive position and healthy profitability. We believe these will allow it to continue earning strong economic profits more likely than not for the next 20 years, resulting in a wide economic moat.

Lam is the market share leader in etch, which is the largest segment of the WFE market, and holds a clear number two share in deposition.

Lam should benefit from immense medium-term AI spending, as chipmakers race to build out more supply to fulfill insatiable demand from AI model builders.

Lam generates good profitability, good free cash flow, and sends most of its cash flow back to shareholders.

Lam lacks the scale of Applied Materials, its largest competitor, and could face market share losses if it is not able to adequately invest.

The company is prone to cyclicality in the semiconductor industry longer-term, which can slow revenue growth and compress margins. This could be exacerbated by the rapid rate of AI investment baked into Lam’s valuation today.

Lam faces geopolitical risk arising from tensions between the US and China that could further restrict its ability to ship into Chinese chipmakers.