This growth action is a good deal right now

Lam Research‘s (NASDAQ: LRCX) The stock price fell nearly 2% after its first quarter FY2022 results were released on October 20. Some investors rejected the company’s weaker-than-expected forecast.

However, shares of the semiconductor equipment supplier have risen impressively over the past month (see chart below). The recent Lam Research share rally is not surprising as it gives investors a way to capitalize on the global semiconductor shortage and growing demand for memory chips.

Let’s take a look at why buying Lam shares right now might turn out to be a smart move in the long term.

LRCX data by YCharts.

Lam Research is growing at a breakneck pace

The company’s first-quarter revenue was up 35% year-over-year to $ 4.3 billion. Impressive revenue growth is driven by increased sales of semiconductor manufacturing equipment and increased demand for customer support as Lam customers seek to improve the productivity of their equipment installed to increase usage and meet the high demand for chips.

Lam’s adjusted profit rose 47% year-on-year in the third quarter to $ 8.36 per share, despite higher transportation and logistics costs due to supply chain constraints. However, Wall Street expected earnings per share of $ 8.23 ​​on revenue of $ 4.32 billion, so Lam’s numbers were mixed as he missed the highest estimate. Short-term forecasts also fell short of expectations.

Lam expects second-quarter earnings of $ 8.45 per share on revenue of $ 4.4 billion in the middle of his forecast range. While that would translate into solid year-over-year growth against adjusted earnings of $ 6.03 per share and revenues of $ 3.46 billion in the prior year period, Wall Street was looking for more. Lam’s projections were slightly lower than analysts’ expectations of $ 8.47 per share in earnings on $ 4.41 billion in revenue.

Management noted on the October earnings conference call that Lam Research faces “production challenges in our global supply chain that continue to negatively impact our revenues and gross margin.” Lam’s chief financial officer, Doug Bettinger, added that “the timelines remain stretched and we continue to have unmet demand.”

Man looking at a line graph on a laptop.

Image source: Getty Images

The company could easily have exceeded expectations had it not been for the supply chain challenges it faces. Savvy investors, however, should focus on the big picture, as the market in which Lam operates is destined for secular growth.

The company supplies manufacturing equipment to foundries and memory manufacturers through its systems segment, which generated 69% of its total revenue in the last quarter. Segment revenue grew 36% year-over-year, primarily driven by strong demand from memory manufacturers. Specifically, 64% of Lam’s revenue comes from the supply of manufacturing equipment to suppliers of DRAM (dynamic random access memory) and NVM (non-volatile memory).

The good part is that memory makers have committed billions of dollars to increasing their manufacturing capabilities in the coming years, which should pave the way for long-term growth at Lam Research.

Heavy investments in memory manufacturing will be a tailwind

The demand for memory chips is expected to grow rapidly in the coming years, thanks to applications such as the Internet of Things, connected cars, high performance computing (HPC) data centers, and 5G smartphones, among others. A third-party report estimates that the global memory market could generate nearly $ 368 billion in revenue by 2024, up from $ 173 billion in 2019.

Unsurprisingly, memory manufacturers are stepping up their investments to increase production. Micronic Technology recently announced that it will spend $ 150 billion over the next decade on memory manufacturing and research and development (R&D) to meet end-market demand.

Samsung, on the other hand, plans to spend a total of $ 205 billion on its core businesses over the next three years, which include both non-memory chips and memory chips. SK Hynix, another memory maker, also said earlier this year that it plans to expand its manufacturing capacity.

Given these favorable winds, it’s no surprise why analysts expect Lam’s revenue to rise 21% this fiscal year, while earnings are expected to jump nearly 27% from last year. ‘last year. In addition, Lam’s profits are expected to grow at an annual rate of more than 16% over the next five years. It should also be noted that investors can invest in Lam stock at an attractive valuation, as it is currently trading at just 22 times earnings behind, compared to the S&P 500average of nearly 29.

All of this makes Lam a top tech stock to buy right now, as it can support its recent rally and offer more long-term potential.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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