Lam Research (NASDAQ: LRCX) is a lesser-known company in the semiconductor industry compared to powerhouses like NVIDIA (NASDAQ: NVDA) and Taiwan Semiconductor (NYSE: TSM), but it is an important one. 

Let’s examine the company’s annual report to better understand its operations and identify some headwinds and tailwinds.

Lam Research: Industry-Leading Semiconductor Equipment Provider

Lam Research’s business is all about providing equipment that performs specific tasks in the semiconductor fabrication process. Lam focuses particularly on deposition, etching, and cleaning.

Deposition involves placing a thin layer of material on a silicon wafer. A lithography device then exposes the wafer to light in the specific pattern of the circuit design. Chemical reactions imprint that design on the wafer, essentially creating a stencil of the design. ASML (NASDAQ: ASML) is a company that specializes in making lithography equipment.

Once the pattern is imprinted, the unwanted parts of the wafer are removed through the etching process. Applied Materials (NASDAQ: AMAT) and Tokyo Electron (OTCMKTS: TOELY) are two other firms specializing in etching.

The wafer is then cleaned to remove unwanted particles left from the etching process that could cause defects. These steps repeat several times until all the desired designs on a chip are created.

The company breaks down its revenue into three primary groups based on the type of company it provides equipment to. The categories are memory, foundries, and logic companies. It sells to all these firms because, although foundries like TSMC focus only on fabrication, memory chip companies like Samsung (OTCMKTS: SSNLF) design and fabricate their chips.

Additionally, Intel (NASDAQ: INTC) is known for designing and fabricating its own logic chips. This makes Samsung and Intel known as “integrated device manufacturers." In fiscal 2023, memory market sales made up 42% of total revenue, foundry market sales made up 38%, and logic sales made up 20%.

Lam Beats Estimates in Recent Earnings Report

Lam beat adjusted earnings per share (EPS) and revenue estimates in its fiscal Q4 2024 earnings. Their adjusted EPS of $8.14 represented an earnings surprise of 7%, while their revenue of $3.87 billion was a surprise of 1%. Their adjusted EPS guidance for fiscal Q1 2025 of $8.00 was two cents below expectations.

Stock Splits and Buybacks Provide Benefits to Shareholders

Lam recently made two announcements that should be positive for its stock price. With shares currently trading at $864, the company recently announced a 10-for-1 stock split.

This aims to make the company's shares more accessible to investors who want to buy in full share increments, not fractional shares. The move should boost the shares' liquidity, allowing buying and selling without much impact on the stock price.

However, the significance of this should not be overblown, as it does not change the actual value of the company, just the dollar value of each share.

A more relevant announcement is the $10 billion share repurchase program. It comes at a good time, as the firm's shares are trading around 6% below their average for the year right now. This repurchase program accounts for about 9% of the firm's market capitalization and should provide a boost to EPS.

Weighing Export Restriction Headwinds and Possible Demand Tailwinds

One key risk to watch out for is further restrictions on the sales of semiconductor equipment to China. China makes up the bulk of the firm’s sales, at 39%. Korea is the next closest, at 19%. The Biden administration reportedly “plans to add 120 Chinese entities to its restricted trade list."

This would significantly affect U.S. companies like Lam’s ability to sell to any Chinese company on the list. The needed licenses would likely not be granted. In the past, companies have found workarounds to continue selling to China despite the barrage of government restrictions.

Another good sign for Lam is the recent results from Samsung, one of its key customers. The company’s sales increased 23% from the previous year's quarter, and earnings per share increased by over six times. This was largely due to robust demand for its High Bandwidth Memory (HBM) chips from hyperscaler customers investing in AI.

The company also saw price improvements, increasing its gross margin by nearly 10%. This demand should hopefully bleed down, spurring demand for Lam’s equipment.