To The Moon

There are a large number of bulls in the semiconductor industry. Today, let's talk about the king of etching-- Lam Research $Lam Research(LRCX)$ .

Lam Research is one of the world's top five suppliers of semiconductor manufacturing equipment and services, including film deposition, etching, degluing cleaning equipment and optimization solution services such as transistors and interconnects. It has been developing for more than 40 years.

Etching, lithography, and thin film deposition equipment account for about 24%, 23% and 18% of the value of wafer manufacturing equipment, respectively, and they are the three core equipments.

In the field of lithography, ASML $ASML Holding NV(ASML)$ is the absolute king, with a market share of more than 82%. But in the field of etching machines, Lam Research occupies an absolute leading position, with a market share of 47% in 2020, far exceeding competitors Tokyo Electron $Tokyo Electron Ltd.(TOELF)$ (27%) and Applied Materials $Applied Materials(AMAT)$ (17%).

What exactly does the etching equipment do? What is the competitiveness of the products Lam Research? Because I am not a semiconductor professional, so I cannot give you the answer. But I believe that 99% of investors do not understand etching machines.

However, financial research can help us understand Lam Research.

First of all, as mentioned above, in the field of semiconductor equipment, the characteristics of giant monopoly are very obvious. For example, lithography machines have been basically monopolized by ASML since the 21st century. If you go back to the 1980s, the only lithography machine players are ASML, Nikon $Nikon Corp.(NINOF)$ and Canon $Canon, Inc.(CAJFF)$ .

Today, the three major players of lithography machines are still ASML, Nikon and Canon, and there are basically no new players in the game.

The same is true of etching equipment. Lam Research, Tokyo Electronics and Applied Materials accounted for the overall market share of nearly 90%!

Why do semiconductor devices have this characteristic?

First, the semiconductor equipment is sophisticated, the technology is extremely difficult, and the equipment has obvious iterative characteristics. The cost of capital investment and time investment for new players is extremely high. For example, Ram Research's R&D investment in 2022 is as high as $1.7 billion, and the R&D expense rate is close to 10% :

Second, the adhesion between the wafer factory and the equipment factory is very high, as we all know, the chip manufacturing cost is very high, if the production equipment is changed blindly, the debugging time is long, and the yield is difficult to be guaranteed. Therefore, it is very difficult for new players to get support from downstream customers.

Based on the above 2 points, players in the field of semiconductor equipment are extremely fixed. In recent years, only Chinese mainland has forcibly cultivated semiconductor equipment factories, such as Advanced Micro-Fabrication Equipment Inc. China $Advanced Micro-Fabrication Equipment Inc. China(688012)$ and NAURA Technology Group Co., Ltd $Naura Technology Group Co.,Ltd.(002371)$ under the US chip blockade. But in terms of technical strength and market share, even if China invests trillion in subsidies, the market share of the two companies was only 2.3% in 2022.

Moreover, the reason why China has been able to cultivate Advanced Micro-Fabrication Equipment Inc. China and NAURA Technology Group Co., Ltd, mainly for China is the largest market for semiconductor products, while other countries either have small market demand, or no have the United States to suppress, and lack the motivation to cultivate independent semiconductor equipment factories.

Among the customers of Lam Research, China is the largest buyer, accounting for 26% of total revenue:

Therefore, if there are no major changes, Lam Research does not need to worry investors in terms of product advancement.

From the perspective of revenue over the years, Lam Research shows a cyclical fluctuating growth characteristic, which is consistent with the characteristics of the semiconductor industry:

Despite the sharp decline in corporate earnings, the stock price is close to an all-time high:

The reason behind or the advent of the AI era catalyses the semiconductor equipment factory to usher in a new round of high growth.

In the development of the semiconductor industry, the first wave of development came from the demand for home appliances.With the advent of the PC era, the semiconductor industry once shone brilliantly in the Internet bubble in 1999.

After the 2008 financial crisis, the mobile Internet swept the world, and the semiconductor industry, driven by smartphones and data centers, ushered in a blowout again.

Looking ahead to 2030, the development of AI technology is expected to make semiconductors a trillion-dollar market, an increase of 74% from 2022.

As semiconductor applications become more extensive, the performance volatility of semiconductor equipment factories has also declined sharply. For example, in the semiconductor downward cycle around 2000, Lam Research revenue fell by as much as 38%, and fell 55% during the financial crisis in 2008. In 2018 and this round of semiconductor downside cycle, Lam Research revenue fell by only about 15%.

As a result of the decline in volatility, the profitability of Lam Research has also improved qualitatively. In the 1990s, the net interest rate of Lam Research was about 7%. In the first decade of the 21st century, the net interest rate was about 20% in the upward cycle, and after 2018, the net interest rate of Lam Research was stable at around 27%.

In terms of gross profit margin, Lam Research was only 44.6% in fiscal year 2023, no significant increase over the last century, so it is considered that the decline in expense rate has improved profitability.

At present, the Lam Research sales and management expense rate is only 4.8%, and the R&D expenditure rate is 9.9%, both of which are significantly lower than in fiscal year 2009:

Application Materials and Tokyo Electron also have the same characteristics.

After a sharp increase in stability and profitability, Lam Research's price-to-book valuation has also soared, considering that a new semiconductor business cycle will begin early next year, so the share price of Lam Research will eventually set a new record!