Lam Research: Is a NAND Upgrade Cycle the Next Growth Catalyst?

Key Points

• Chip equipment maker Lam Research posted impressive results for its quarter ended in Dec. of 2024.
• The company is hoping for an upgrade cycle in a key technology, NAND memory, to contribute significantly to growth in 2025 and beyond.
• Looking into commentary from NAND chip makers can provide insight into how long it might take for NAND demand to materialize.

Shares of semiconductor equipment maker Lam Research NASDAQ: LRCX are off to a hot start in 2025. Around half of the stock's 15% gain on the year came the day after its full-year 2024 earnings release. Below, I’ll provide a detailed breakdown of the important financial metrics in the tech company’s report. I’ll also analyze the prospects of a key growth driver: NAND memory. I’ll conclude by giving my overall take on Lam Research shares.

Lam's Financials Outshine Expectations

In its latest report, Lam Research beat earnings estimates both on the top and bottom lines. In Q4, revenue grew by 16% to nearly $4.4 billion. Adjusted earnings per share (EPS) increased by 21%, beating out analyst estimates moderately.

Diving deeper into key underlying metrics of the report also showed impressive improvements on several fronts. The company’s adjusted gross margin and adjusted operating margin both outperformed the guidance it set out in September. It did so by 50 basis points and 70 basis points from the midpoint of guidance, respectively. The company’s total revenue from China dropped significantly, even as overall revenue grew. Its revenue percentage from China decreased by 6% to 31% overall. Revenues from Korea increased by 7% to 25% of the total. It's crucial for the company to move away from China. Export restrictions on semiconductors and a trade war with the United States pose a risk.

In the current quarter, Lam is forecasting revenues to increase by nearly 6% from Q4 2024. At the midpoint, it also sees adjusted gross margin increasing by 50 basis points and adjusted operating margin rising by 130 basis points.

Decoding Lam's NAND Ambitions: A Deep Dive into Growth Drivers

Lam builds equipment for the deposition and etch phases of making semiconductors. Upgrading these steps in semiconductor manufacturing is vital for increasing chip performance. One of the important drivers that Lam Research sees for growth in 2025 and beyond is an upgrade cycle for NAND memory chips. The company makes key equipment used to make NAND chips. It is also on the forefront of building the next generation of equipment needed to make better NAND chips. The company and analysts mentioned NAND 43 times in the earnings call. This was far more than the mention of any other product category, highlighting its strategic importance.

Lam argues that two-thirds of the industry has aged NAND memory-making equipment in its installed base. To build higher performance chips, the equipment must be upgraded. Overall, the company said that NAND spending “remained at muted levels." However, it did mention that momentum was strong for its new NAND-making product.

Looking into some of the commentaries of NAND makers can provide insight into what is to come for Lam Research in this space. For example, Samsung Electronics OTCMKTS: SSNLF said it is decreasing the proportion of “legacy products in NAND amid limited bit growth." However, it is doing this to optimize its portfolio on advanced node-based QLC SSD NAND. QLC stands for quad-level cell, which is an advancement over triple cell level technology. This type of technology is important for enterprise storage. The company is focused on “expanding our advanced node production capacity” at NAND.

Another NAND maker, SK Hynix, says it sees NAND demand growth in the low teens for 2025. However, in the first quarter of 2025, it sees a “high-teen percentage decrease in NAND shipments." NAND sales for enterprise applications are doing well. However, PC and mobile applications still account for a large share of NAND sales. These markets are still seeing “delayed demand recovery."

Prudent Patience: Evaluating Lam's Value and Potential

Lam Research is now trading at a forward price-to-earnings (P/E) ratio of 22x. This is moderately above its average over the last five years. The average of four price targets tracked by MarketBeat released after the company’s earnings report implies upside of just 10% in shares. This assumption uses a mid-day Feb. 7 trading price of just under $83.

Overall, the company’s results were impressive, and some of the commentary from NAND makers adds validity to the company’s claim that an upgrade cycle is coming.

However, it appears that it could happen closer to the second half of 2025. At this point, I’d want to see further information to support the arrival of this upgrade cycle. I believe it is prudent to wait until the next earnings reports for Lam and NAND makers come out before buying in.