Semiconductors, or chips, are essentially the building blocks of modern technology. They are often made from silicon sliced into thin wafers and contain countless microscopic circuits. As you can imagine, manufacturing semiconductors is a highly complex process that requires state-of-the-art technology.
Lam Research (LRCX -0.59%) sells specialized equipment used in semiconductor production. The company's history dates back to the 1980s, but thanks to the rise of artificial intelligence (AI), investors should be excited about its future potential.
The stock won't make you rich overnight, but it can help you retire a millionaire as part of a diversified long-term portfolio. Here's why:
The smaller the chips go, the bigger the investment opportunity
The investment pitch for Lam Research boils down to the company's important role in the semiconductor space and where technology is trending.
Lam Research sells various products used in fabrication, the term used to describe the semiconductor manufacturing process. As fabrication technology improves, companies can fit more circuits on smaller chips. That's why today's smartphone can fit in the palm of your hand, yet it contains a computer that is exponentially more powerful than a desktop computer from 1990.
Modern electronics use increasingly complex chips and require more of them. That's created decades of steady demand for Lam Research's products, and that trend isn't likely to end soon.
Various up-and-coming technologies will require highly complex semiconductors, including:
- Artificial intelligence (AI)
- Autonomous driving
- Factory automation
- Quantum computing
According to McKinsey & Company, companies worldwide could invest as much as $1 trillion in fabrication by 2030! It's an ongoing push to put more circuits on smaller pieces of silicon. Ultimately, it makes technology possible that was only sci-fi a decade or two ago. I don't know what the world will look like in 20 or 30 years, but Lam Research's equipment will probably help build it.
Lam Research is a bonafide compounder
Lam Research is prone to boom-or-bust investment cycles within the semiconductor industry. You can see how that has impacted annual sales:
LRCX Revenue (TTM) data by YCharts
More important than the year-to-year ebb and flow is that the broader trend is up. I also like how Lam Research's return on invested capital (ROIC) has gradually improved. It shows that the business effectively creates value with its financial resources and can indicate a competitive moat. I usually look for companies with a consistent 10% or better, and Lam Research easily clears that.
A consistently high return on capital snowballs over years or decades and can help drive earnings growth (and investment returns). The stock has returned over 37,938% since the mid-1980s, turning a modest $1,000 investment into over $379,380.
The price is right to buy today
The longer you hold a stock, the more a company's growth and ROIC will dictate the stock's returns. That's why famed investor Warren Buffett prefers investing in great companies at fair prices over average companies at cheap prices. In other words, you don't need to split hairs with great companies like Lam Research. As long as the price is reasonable, the stock should take care of you in the long run.
Lam Research has steadily retreated from its highs since July. China is a big customer for Lam Research, and geopolitical tensions have raised concerns about how they might impact business. Additionally, recent underwhelming guidance from industry peer ASML weighed on semiconductor equipment stocks. ASML warned of sluggish demand for non-AI chips.
Remember that the semiconductor industry has ups and downs and that as long as the industry grows over time, Lam Research should be just fine. The good news is that these concerns have brought the stock down to an attractive price for buyers. The stock trades at roughly 23 times 2024 earnings estimates, and analysts estimate the company will grow earnings by an average of 13% to 14% annually over the next three to five years. Shares aren't a bargain at 24 times earnings for that anticipated growth, but plenty reasonable for long-term investors.
Lam Research is a blue-chip compounder poised to ride the innovation wave across AI and other technologies. I wouldn't be surprised to see the stock continue to make investors very wealthy over the next two or three decades.
