If AI-based management restructuring is realized, the company's stock price could skyrocket.
of Nasdaq 100 Technology Sector The index has gained an impressive 50% over the past year. This was largely due to increased demand for artificial intelligence (AI)-related hardware and software, which caused many companies' stock prices to soar.
The good news is that the Nasdaq's AI-driven rally is here to stay.Big tech companies such as alphabet and microsoft Recently, we have seen a significant increase in revenue thanks to AI. More importantly, history shows the Nasdaq's upward trajectory is sustainable this year.
That's why it would be a good idea for investors to buy the stock. ram research (LRCX 2.81%), a Nasdaq 100 constituent, has soared 77% over the past year and, as the latest results show, still has the potential for big gains. Let's see why.
Lam Research turns around thanks to AI
Lam Research announced its fiscal year 2024 third-quarter financial results on April 24th, revealing that its sales and bottom line exceeded expectations. The company, which sells semiconductor manufacturing equipment, reported sales of $3.79 billion for the three months ended March 31, beating consensus estimates of $3.72 billion.
Additionally, the company's adjusted earnings were $7.79 per share, up 11% year over year and beating consensus estimates of $7.30 per share. Lam management attributes the company's growth to an improved environment for semiconductor equipment spending.
It's worth noting that Lam Research derives 44% of its total revenue from supplying manufacturing equipment to memory manufacturers. The good news is that the company is seeing improved spending on memory manufacturing equipment due to increasing demand for high-bandwidth memory (HBM) used in AI chips.
This is not surprising, as the demand for HBM has increased tremendously recently. HBM shipments could increase by 150% this year and 43% in 2024, according to Yole Group. The overall demand for data center-related dynamic random access memory (DRAM) is expected to grow at an annual rate of 25% starting in 2024. From 2025 to 2029, Lam Research is riding on solid long-term growth opportunities.
Spending on memory manufacturing equipment is expected to increase steadily through 2024 and beyond. Industry group SEMI predicts that spending on DRAM equipment will increase by 3% this year and another 20% in 2025. Meanwhile, spending on NAND flash memory devices is expected to increase by 21% in 2024 and 51% this year.
So it was no surprise that Lam Research's guidance for the quarter came in better than analysts expected. Management expects sales of $3.8 billion for the quarter and adjusted earnings of $7.50 per share at the midpoint of its guidance range. Analysts expect the company to settle for earnings of $7.30 a share on revenue of $3.77 billion.
More importantly, Lam's guidance indicates a return to top-line growth this quarter. The company earned $5.98 per share in the same period last year on revenue of $3.21 billion. That said, guidance indicates that sales are expected to increase 18% year-over-year this quarter, following his 2% decline last quarter. Revenue growth is expected to be even greater, with a 25% increase year-over-year.
More importantly, analysts expect a solid turnaround in Lam's business performance in the new financial year starting in July this year.
Lam's rapid growth acceleration suggests a healthy rise in stock prices
Lam Research is expected to end the current fiscal year with sales down 15% to $14.9 billion. Earnings are expected to narrow to $29.68 per share from $34.16 a year ago. This is not surprising, as the company has previously struggled due to a weak memory spending environment.
However, the following graph shows that Lam's revenue and profit growth is likely to remain healthy over the next few fiscal years.
The company's stock currently trades at a trailing P/E of 34x and a forward P/E of 25x. The low forward earnings multiple indicates that Lam's earnings will rise significantly, and is lower than the Nasdaq 100's forward earnings multiple of 26 times. Assuming that Mr. Lam continues to trade at a forward earnings multiple of 25x in a few years and the bottom line actually reaches its final profit, the stock price could rise to $46.24 and $1,161 based on the chart above. This would be a 25% increase from current levels.
However, don't be surprised if this AI stock delivers stronger upside, as the market could reward it with richer multiples thanks to its potential growth acceleration. Investors should consider buying Lam Research stock before it rises further.
Alphabet executive Suzanne Frye is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Lam Research, and Microsoft. The Motley Fool recommends the following options: His January 2026 $395 long call on Microsoft and his January 2026 $405 short call on Microsoft. The Motley Fool has a disclosure policy.