Why Lam Research (LRCX) Is a Must-Buy in the Semiconductor Sector Amid AI and Chip-Making Growth

The semiconductor industry is undergoing a seismic shift, driven by the insatiable demand for artificial intelligence (AI) hardware. At the forefront of this transformation is Lam Research (LRCX), a company whose strategic alignment with AI-driven manufacturing and undervaluation relative to peers like ASML make it a compelling long-term investment. With the global wafer fabrication equipment (WFE) market projected to reach $105 billion in 2025, Lam's dominance in critical processes for advanced AI chips positions it as a key beneficiary of this technological inflection.

Strategic Positioning: The AI Semiconductor Catalyst

Lam Research's tools are indispensable for manufacturing the next-generation chips powering AI workloads. Its deposition and etch systems are critical for technologies like Gate-All-Around (GAA) transistors, High-Bandwidth Memory (HBM), and 3D NAND architectures, all of which are foundational to AI and high-performance computing. For instance, Lam's SABRE 3D and plating tools are central to heterogeneous integration, a process enabling the production of AI chips with higher performance and efficiency.

The company's geographic footprint further amplifies its strategic advantage. China, Korea, and Taiwan—accounting for 76% of Lam's Q2 2025 revenue—are the epicenters of AI-driven wafer fabrication and packaging. With Chinese semiconductor manufacturers ramping up investments in AI infrastructure, Lam's exposure to this market is a tailwind, not a risk. Its 6,000 installed plating cells, the largest in the industry, underscore its scalability to meet the surging demand for AI chips.

Financial Performance: Profitability and Margin Expansion

Lam's financials in Q2 2025 were nothing short of stellar. The company reported $5.17 billion in revenue, a 33.6% year-over-year increase, with non-GAAP EPS of $1.33, surpassing estimates by 10.3%. Gross margins expanded to 50.3%, the first time in recent quarters they've crossed the 50% threshold. This margin expansion reflects a favorable product mix and operational efficiency, translating AI-driven demand into profitability.

Lam's balance sheet is equally robust, with $5.5 billion in cash and short-term investments as of March 2025. This liquidity provides flexibility for R&D investments and capital expenditures, ensuring the company stays ahead of the curve in technologies like backside power distribution and advanced packaging.

Undervaluation vs. ASML: A Comparative Edge

While ASML (ASML) is the undisputed leader in EUV lithography, Lam Research trades at a significant discount relative to its fundamentals. ASML's P/E ratio stands at 24.88, while Lam's is 26.43. On a price-to-sales (P/S) basis, ASML's ratio is 7.21, compared to Lam's 7.16. The EV/EBITDA gap is narrower, with ASML at 18.89 and Lam at 21.06, but Lam's higher growth in AI-driven markets justifies a premium.

ASML's dominance in lithography is undeniable, but its valuation reflects a mature market. In contrast, Lam is capitalizing on billion-dollar inflections in the semiconductor cycle, such as GAA and CoWoS 2.5D packaging. Analysts project CoWoS capacity to double by 2026, a segment where Lam's tools are already in high demand.

Risks and Mitigants: Navigating the AI Boom

Critics may highlight Lam's 35% China revenue exposure, a potential overhang due to U.S. export controls. However, this exposure is a double-edged sword: while regulatory risks exist, China's aggressive AI investments mean demand for Lam's tools is unlikely to wane. Additionally, Lam's strong cash position and high gross margins (50.3%) provide a buffer against geopolitical volatility.

Another concern is valuation. Lam's P/E and EV/EBITDA ratios are elevated, but these multiples are justified by its 33.6% YoY revenue growth and a 9.5% quarter-on-quarter increase in Q2 2025. The market is pricing in sustained demand from AI, and with the WFE market expected to hit $105 billion in 2025, Lam's growth trajectory is intact.

Investment Thesis: Buy for the Long Game

Lam Research is a must-buy for investors seeking exposure to the AI semiconductor boom. Its technological leadership in critical processes, profitability, and strategic alignment with high-growth markets make it a standout in a sector dominated by cyclical volatility. While ASML remains a top-tier play, Lam's undervaluation relative to its growth potential offers a more compelling entry point.

Recommendation: Investors should initiate a position in LRCX at current levels, with a long-term horizon. The stock's recent 7% pullback following earnings—driven by concerns over China exposure—presents an opportunity to buy into a company that is both a beneficiary of AI's rise and a relative bargain compared to its peers.

In conclusion, Lam Research is not just riding the AI wave—it is building the tools that will power the next era of computing. For investors with a focus on innovation and value, LRCX is a semiconductor stock that delivers both.