Executive Summary / Key Takeaways

• AI-Driven Growth Catalyst: Lam Research is exceptionally positioned to capitalize on the burgeoning AI infrastructure buildout, with its core etch and deposition technologies becoming increasingly critical for advanced CPU/accelerator, HBM, and enterprise SSD manufacturing, translating to an estimated $8 billion in WFE spending for every $100 billion of data center investment.
• Record Performance and Margin Expansion: The company delivered record revenues of $5.3 billion and a record operating margin of 35% in the September 2025 quarter, contributing to an all-time high watermark in financial performance for calendar year 2025, driven by strong execution and strategic investments in operational efficiencies.
• Technological Moat and SAM Expansion: Lam's differentiated product portfolio, including innovations like the Halo ALD Moly tool, Ether Dry Resist EUV patterning, and ACARA conductor etch, is enabling critical technology inflections across NAND, DRAM, and foundry logic, expanding its served available market (SAM) and driving market share gains.
• Strategic Resilience Amid Geopolitical Headwinds: Despite an anticipated $600 million revenue impact in calendar year 2026 from new China export restrictions, Lam's agile global manufacturing footprint and diversified customer base, coupled with strong growth in non-China markets, are expected to mitigate these challenges, with China representing less than 30% of revenues in 2026.
• Robust Outlook and Shareholder Returns: Management anticipates a robust setup for WFE spending in calendar year 2026, particularly in the second half, and remains committed to returning at least 85% of free cash flow to shareholders, supported by a strong balance sheet and ongoing share repurchase programs.

Lam's Enduring Foundation and AI-Driven Evolution

Lam Research Corporation, founded in 1980, stands as a pivotal global supplier of innovative wafer fabrication equipment and services to the semiconductor industry. Its strategic evolution, notably marked by the 2013 merger with Novellus, has forged a flexible global manufacturing and supply chain footprint spanning the United States, Austria, Malaysia, Taiwan, and Korea. This infrastructure enhances its responsiveness to dynamic market demands and geopolitical shifts. Lam's core business is deeply embedded in the foundational processes of semiconductor manufacturing: deposition, etch, and clean. These processes are increasingly critical as the industry pushes the boundaries of device complexity and scaling.

The semiconductor industry is currently undergoing a profound transformation, primarily driven by the insatiable demand for Artificial Intelligence (AI) and high-performance computing (HPC). This secular trend necessitates smaller, more powerful, and cost-efficient semiconductors, leading to significant inflections in manufacturing, such as the increasing importance of vertical scaling strategies like 3D architecture and advanced packaging. Lam Research's strategic focus on these etch and deposition-intensive processes positions it at the heart of this evolution, enabling it to expand its served available market (SAM) and capture substantial growth opportunities.

In the competitive landscape, Lam Research operates alongside formidable rivals such as Applied Materials (AMAT), ASML Holding (ASML), KLA Corporation (KLAC), and Tokyo Electron Limited (TSE:8035). While AMAT offers a broader portfolio of materials engineering solutions and ASML dominates in lithography, Lam Research distinguishes itself through specialized expertise in plasma etching and atomic layer deposition. For instance, Lam's Kiyo systems for conductor etch are recognized for their precision in high-volume manufacturing, offering superior efficiency in targeted applications. This specialization allows Lam to carve out a strong niche, particularly in the complex, multi-step processes required for next-generation chips. While direct quantitative market share figures for all niche competitors are not publicly detailed, Lam's strong performance in advanced etch and deposition suggests a robust competitive standing. The company's strategic adaptability is evident in its focus on high-demand areas, yet it acknowledges vulnerabilities in cost structures compared to more diversified competitors.

Technological Leadership: Powering the Next-Gen Semiconductor Era

Lam Research's competitive moat is fundamentally built upon its differentiated technology and relentless innovation in deposition and etch. These processes are becoming exponentially more complex with the advent of 3D device architectures and advanced packaging, which are crucial for AI applications.

The company's Altus Halo system exemplifies this leadership, enabling barrierless atomic layer deposition (ALD) of molybdenum. This technology reduces the resistance of critical contact and interconnect layers by a remarkable 50% compared to legacy technologies. In 3D NAND, this resistance reduction is vital for achieving the superior I/O performance demanded by AI applications. Furthermore, for foundry logic, the transition to advanced gate-all-around (GAA) nodes, particularly below 2 nanometers, faces significant resistance-capacitance (RC) challenges. Replacing tungsten with molybdenum addresses this, driving a roughly 3x increase in Lam's metal deposition SAM per wafer. Lam is currently the only company with ALD Moly tools in production in foundry/logic, securing a key win at a leading foundry customer for next-generation applications in the June 2025 quarter.

Another significant differentiator is Lam's Ether Dry Resist EUV patterning solution. This technology has demonstrated the ability to resolve features of less than 15 nanometers with superior density and pattern fidelity. Critically, Ether enables a more than 10% reduction in EUV exposure dose, which boosts scanner productivity and lowers the cost of patterning per wafer. This innovation is already ramping in the high-volume production line of a major memory manufacturer for HBM and is considered critical for future transitions from GAA to CFET in foundry logic and 6F squared to 4F squared in DRAM. Lam's partnership with JSR Corporation (JSRYY) to integrate Ether with novel EUV patterning materials further solidifies its position in this critical area.

In etch, the new ACARA system has rapidly solidified Lam's market-leading position in conductor etch. Featuring a proprietary, industry-first innovation for ultrafast plasma control, ACARA delivers previously unachievable levels of performance in etch selectivity and profile patterning precision, vital for DRAM scaling. It has secured multiple critical etch applications in a major DRAM manufacturer. Similarly, the Lam Cryo 3.0 dielectric etch technology earned the 2025 SEMI Award and has become an industry standard for advanced NAND devices, enabling higher layer counts and performance.

Beyond hardware, Lam's Semiverse Solutions apply advanced modeling, simulation, data science, machine learning, and artificial intelligence to enhance equipment performance and reduce process optimization time. This capability has been used to successfully defend key dielectric etch applications and is being leveraged to address the global workforce shortage through collaborations with universities, aiming to provide access to tens of thousands of aspiring engineering students. The company also signed new licensing agreements with three large customers for its virtual fabrication platform, Simulator 3D, in the March 2025 quarter. These technological advancements collectively strengthen Lam's competitive moat, contribute to higher average selling prices (ASPs) and margins, and reinforce its market positioning as a critical enabler of next-generation semiconductor manufacturing.

Financial Performance: A Story of Growth and Operational Excellence

Lam Research has demonstrated robust financial performance, reflecting its strategic execution and technological leadership. For the fiscal year ended June 29, 2025, the company reported record revenue of $18.4 billion and a gross margin of 48.8%. This strong annual performance culminated in the September 2025 quarter (Q1 2026), where Lam achieved record revenues of $5.32 billion, a gross margin of 50.6%, and a record operating margin of 35%. This marked the first time gross margins exceeded 50% since the Lam-Novellus merger in 2013, underscoring the success of its operational efficiency initiatives, including the close-to-customer manufacturing strategy.

The September 2025 quarter's revenue growth was primarily driven by an increase in systems revenue, fueled by sustained investments in the foundry market segment and higher customer support-related revenue. Foundry accounted for 60% of systems revenue, marking a third consecutive record quarter for this segment. Memory contributed 34% of systems revenue, with DRAM showing strength from high bandwidth memory (HBM) investments. China represented 43% of total revenue, predominantly from domestic Chinese customers.

Profitability metrics highlight Lam's operational effectiveness. The gross margin improvement in the September 2025 quarter was a result of favorable customer mix, despite headwinds from reduced factory efficiencies, higher tariff-related spend, and increased material costs. Operating expenses increased due to higher headcount and incentive compensation tied to improved profitability, yet the company still achieved a record operating margin. For calendar year 2024, Lam delivered a 160 basis point improvement in operating margin, demonstrating effective cost management while investing heavily in R&D and infrastructure.

Cash flow generation remains strong, providing ample liquidity and supporting capital return initiatives. Cash, cash equivalents, and restricted cash balances grew to $6.70 billion by the end of September 2025, primarily from $1.78 billion in operating activities. The company returned $975.80 million to shareholders through share repurchases and paid $292 million in dividends during the quarter. Lam is committed to returning at least 85% of free cash flow to shareholders over time, having returned 98% ($4 billion) in calendar year 2024. The deferred revenue balance increased to $2.77 billion, indicating strong future revenue potential. The company also proactively managed its debt, retiring $500 million of unsecured notes in the March 2025 quarter and upsizing its revolving credit facility to $2 billion in December 2024, enhancing financial flexibility.

Outlook and Strategic Trajectory: Riding the AI Wave

Lam Research's outlook is characterized by continued growth, driven by the escalating demands of AI and strategic positioning in critical technology inflections. For the December 2025 quarter, management guides for revenue of $5.2 billion (plus or minus $300 million), a gross margin of 48.5% (plus or minus one percentage point), and earnings per share of $1.15 (plus or minus $0.10). This guidance anticipates a decline in China revenue, offset by stronger spending from global multinationals, and acknowledges that customer mix and tariffs will contribute to a sequential decline in gross margin.

Looking further ahead, calendar year 2025 WFE spending is expected to be slightly better than the prior view of $105 billion, primarily due to stronger-than-expected HBM-related investments. Management foresees a robust setup for equipment spending in calendar year 2026, with AI-related demand supporting sustained strength across leading-edge foundry logic, DRAM, and NAND upgrades. While the overall WFE growth for 2026 is not yet quantified, it is expected to be somewhat second-half weighted. The newly restricted China entities, which would have been weighted to the first half of 2026, are now expected to impact calendar year 2026 revenues by approximately $600 million, leading to China representing less than 30% of overall revenues in that year.

Lam's strategy to outperform WFE growth is rooted in the increasing etch and deposition intensity required for advanced semiconductor manufacturing. The company's SAM is projected to expand to the mid-30s percent of WFE in 2025 and to the high 30% range longer term. Lam aims to capture over 50% of this incremental SAM. Key drivers include the estimated $40 billion NAND upgrade cycle over several years, which is accelerating due to higher bit demand for enterprise SSDs. Lam expects to capture a high percentage of this spend due to its large installed base. Investments in advanced packaging, which has seen foundry/logic spending grow more than 6x since 2021 due to AI adoption, will also be a significant tailwind. The company's SABRE 3D plating and Cindian etch systems are industry leaders, with SABRE 3D market share in advanced packaging expected to grow nearly 5 points year-on-year in calendar 2025.

Risks and Competitive Dynamics: Adapting to a Complex Environment

Despite a compelling growth narrative, Lam Research faces several pertinent risks. Geopolitical tensions and trade restrictions, particularly those impacting China, remain a significant concern. The recently announced 50% affiliate rule restricting shipments to certain domestic China customers is expected to have a $600 million revenue impact in calendar year 2026. While Lam has developed an agile global manufacturing and supply chain capability to lessen the direct impact of tariffs, these restrictions can increase manufacturing costs, decrease margins, and strengthen competitors not subject to such limitations. The implementation of the BEPS 2 Pillar Two Global Minimum Tax (GMT) and changes in U.S. taxation under the One Big Beautiful Bill Act (OBBBA) are also expected to slightly increase the effective tax rate in calendar year 2026.

The semiconductor industry's inherent variability and customer concentration also pose risks. Sales to a limited number of large customers constitute a significant portion of Lam's revenue, making it susceptible to changes in their investment plans. Supply chain disruptions, including increased restrictions on substances like PFAS, could impact manufacturing operations and increase costs. Cybersecurity threats, potentially exacerbated by AI capabilities, present ongoing operational risks.

However, Lam's strategic responses are designed to mitigate these challenges. Its diversified product portfolio, strong R&D investments in critical inflections like GAA, HBM, and advanced packaging, and its leadership in etch and deposition technologies provide a competitive edge. The company's focus on advanced services through its Customer Support Business Group (CSBG), including Equipment Intelligence-enabled Dextro cobots, enhances customer loyalty and operational efficiency, offering a stable revenue stream that is accretive to operating margins. This focus on innovation and operational excellence allows Lam to maintain its competitive standing against rivals like AMAT, ASML, KLAC, and Tokyo Electron, even as the industry navigates a complex macroeconomic and geopolitical landscape.

Conclusion

Lam Research Corporation is strategically positioned at the forefront of the semiconductor industry's AI-driven transformation. Its deep expertise in etch and deposition technologies, coupled with a robust portfolio of innovative products like the Halo ALD Moly tool and Ether Dry Resist EUV patterning, is enabling critical advancements across NAND, DRAM, and foundry logic. This technological leadership is not merely a differentiator but a foundational element driving significant served available market expansion and market share gains.

Despite facing headwinds from China trade restrictions and broader industry volatility, Lam's agile manufacturing, strong financial performance, and commitment to shareholder returns underscore its resilience. The company's record revenues and operating margins in recent quarters, alongside a positive outlook for WFE spending in 2026, paint a compelling picture of sustained growth. For discerning investors, Lam Research represents a high-quality investment in the essential "picks and shovels" of the AI revolution, poised for continued outperformance through its unwavering focus on technological innovation and operational excellence.