An AI-driven turnaround could send shares of this company soaring.
The Nasdaq-100 Technology Sector index has gained an impressive 50% in the past year, driven mainly by the growing demand for artificial intelligence (AI)-related hardware and software that has led to a sharp spike in the share prices of many companies.
The good part is that the Nasdaq’s AI-driven surge is here to stay. Big tech players such as Alphabet and Microsoft recently posted robust growth in their earnings thanks to AI. More importantly, history indicates that the Nasdaq’s upward trajectory is sustainable this year.
That’s why investors would do well to buy shares of Lam Research (LRCX 2.81%), a Nasdaq-100 component that has jumped 77% in the past year — and can still deliver strong gains, as its latest results show. Let’s look at the reasons why.
Lam Research is turning around thanks to AI
Lam Research released fiscal 2024 third-quarter results on April 24, and its top and bottom lines turned out to be better than expected. The company, which sells semiconductor manufacturing equipment, reported $3.79 billion in revenue for the three months that ended on March 31, beating the consensus estimate of $3.72 billion.
Additionally, the company’s earnings increased 11% year over year to $7.79 per share on an adjusted basis, ahead of the $7.30 per share consensus estimate. Lam management attributed the company’s growth to an improved environment for semiconductor equipment spending.
It is worth noting that Lam Research gets 44% of its total revenue from supplying manufacturing equipment to memory manufacturers. The good part is that the company is witnessing an improvement in spending on memory manufacturing equipment, driven by the growing demand for high-bandwidth memory (HBM) used in AI chips.
That’s not surprising as HBM demand has taken off impressively of late. According to Yole Group, HBM shipments could grow 150% this year, followed by a 43% increase in 2024. The overall demand for data center-related DRAM (dynamic random access memory) is expected to increase at an annual rate of 25% from 2025 to 2029, indicating that Lam Research is sitting on a solid secular growth opportunity.
Spending on memory manufacturing equipment is expected to grow nicely in 2024 and beyond. Industry association SEMI is forecasting DRAM equipment spending to increase by 3% this year, followed by a much stronger increase of 20% in 2025. Meanwhile, spending on NAND flash memory equipment is forecast to jump 21% in 2024 and 51% this year.
As such, it wasn’t surprising to see Lam Research’s guidance for the current quarter turn out to be better than what analysts were expecting. Management guided for $3.8 billion in revenue in the current quarter, along with adjusted earnings of $7.50 per share at the midpoint of its guidance range. Analysts would have settled for $7.30 per share in earnings on $3.77 billion in revenue.
More importantly, Lam’s guidance indicates that it is set to return to top-line growth in the current quarter. The company delivered $5.98 per share in earnings in the year-ago period on revenue of $3.21 billion. So, the guidance indicates that its revenue is set to increase 18% year over year in the current quarter following a 2% dip in the previous one. The bottom-line growth is expected to be even stronger with a projected year-over-year increase of 25%.
More importantly, analysts are predicting a solid turnaround in Lam’s performance in the new fiscal year, which will begin in July this year.
A sharp acceleration in Lam’s growth points toward a healthy jump in its stock price
Lam Research is expected to end the current fiscal year with a 15% decline in revenue to $14.9 billion. Its earnings are projected to shrink to $29.68 per share from $34.16 per share in the previous fiscal year. That’s not surprising as the company was struggling earlier on account of a weak memory spending environment.
However, the following chart tells us that Lam’s revenue and earnings growth are likely to remain healthy over the next couple of fiscal years.
LRCX Revenue Estimates for Next Fiscal Year data by YCharts
The stock is currently trading at 34 times trailing earnings and 25 times forward earnings. The lower forward earnings multiple points toward a nice jump in Lam’s earnings, and it is lower than the Nasdaq-100’s forward earnings multiple of 26. Assuming Lam continues to trade at 25 times forward earnings after a couple of years and its bottom line indeed hits $46.24 based on the chart above, its stock price could increase to $1,161. That would be a 25% jump from current levels.
However, don’t be surprised to see this AI stock delivering a stronger upside as the market could reward it with a richer multiple thanks to the potential acceleration in growth. Investors should consider buying shares of Lam Research before it soars further.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Lam Research, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.