Lam Research – Not the Flashiest Name in Semiconductors, But One of the Best
A Record Quarter and an Outlook That Keeps Getting Better
Last week, semiconductor equipment leader Lam Research published its fiscal Q3 results and absolutely blew past consensus estimates, delivering strong results and sensational guidance, once again proving that we just continue to underestimate the sheer strength and likely durability of the underlying growth drivers, as Lam’s outlook just continues to be revised upward.
To no surprise, Lam is fully benefiting from the AI boom, or more precisely, from the massive investments being made to build out the computing infrastructure required to support it. Rising demand for computing infrastructure drives demand for high-end semiconductors, which in turn fuels a surge in capital expenditure by foundries and memory manufacturers, including TSMC, Intel, Samsung, and Micron.
That spending ultimately flows through to the suppliers of the equipment used to manufacture the chips powering data centers, including Lam.
This broader narrative is well understood by now, and it continues to strengthen as demand is proving real and durable. What is far more often overlooked, however, is that Lam Research is structurally better positioned than most of its peers, and this gets proven quarter after quarter.
You see, the company is the undisputed industry leader in three critical semiconductor manufacturing technologies — deposition, etching, and wafer cleaning. Crucially, as nodes shrink, these technologies become more critical, and usage intensity grows as chips become more complex, enabling Lam to well outpace the WFE industry and gain market share rapidly.
It’s this that makes Lam such a phenomenal pick in the industry and what is driving stunning financial results and a blinding outlook that continues to be revised upward quarter after quarter.
Honestly, it’s just a fantastic business, with strong, industry-leading financials, a mega and strengthening medium-term outlook, and one of the best management teams out there!
And that is exactly why Lam is one of the 14 positions currently in my personal portfolio.
Today, I want to take a close look at Lam’s fiscal Q3 results, breaking down and reviewing the numbers, assessing last quarter’s developments, and ultimately updating my view of the company, thesis, and financial forecast.
Let’s delve in!
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Financial & Performance Review
Let’s just jump straight into the numbers!
In fiscal Q3, Lam delivered a record quarterly revenue of $5.84 billion, coming in at the high end of guidance and surpassing the consensus by $80 million. This reflects 9% sequential growth and 24% YoY growth, showing excellent momentum, as anticipated, with demand holding up extremely well despite a lack of cleanroom space, in part thanks to a strong upgrade business.
While growth rates fluctuate from quarter to quarter due to the timing of revenue realization, this low-to-mid twenties rate is strong and here to stay.
Breaking down revenue by type, Lam reported systems revenue of $3.73 billion, up a very healthy 23% YoY, as more fabs come online and Lam bolsters production capacity.
The dynamic of cleanroom space availability is interesting here. You see, even though demand is absolutely booming, Lam’s actual systems revenue growth is capped primarily by the availability of cleanroom space.
You see, new fabs and cleanroom expansions take years to build. This is the entire bottleneck right now. Semiconductor demand is exploding, but getting the fabrication facilities (fabs) online to produce them takes years, so the space available currently to deliver new manufacturing equipment, like Lam’s, is limited. This 23% growth in system sales understates demand and reflects the availability of space.
The implication is actually bullish: the demand is real and queued up. As new cleanroom capacity comes online over the coming years (and hundreds of billions in fab construction are already underway globally), that pent-up demand converts into revenue. Lam’s growth runway is essentially pre-booked by its customers’ construction timelines and is being spread out.
Nonetheless, this low-twenties growth in system sales in Q3 is excellent, and this dynamic means it can be maintained throughout 2026 and likely into 2027 and 2028, if not even accelerate as the outlook for fab completion in 2027 and 2028 is strong.
Breaking down this $3.73 billion in systems revenue, which accounted for 64% of the total, foundry accounted for the majority of Q1 sales at 54%, growing 35% YoY, thanks to investment in leading-edge nodes and ongoing mature-node spending. Advanced packaging equipment continues to be a strong growth driver here.
Memory accounted for 39% of system sales, with 27% from DRAM. DRAM revenue was up an impressive 45% YoY, driven by HBM investments from Micron, Samsung, and SK Hynix. The shift to 1c nodes and beyond is driving strong demand for Lam equipment.
The remainder came from NAND, which is now also seeing accelerating demand, but the impact is more delayed than with DRAM.
Breaking down sales by region, the only real focus remains China. The reason is that the risk of additional, stricter U.S.-imposed export restrictions on China persists, meaning that high exposure to China directly raises revenue risk.
Positively, Lam’s exposure to Chinese customers is falling. China accounted for 34% of Q3 revenue, down from 35% in the prior quarter. Management expects a further decline throughout the year, guiding for flat Chinese revenue in calendar year 2026, which should result in a strong decline in exposure, which improves the risk profile.
China will likely account for a low-thirties-percentage share of calendar-year 2026 sales, still considerable but lower than in recent years, a huge positive.
Moving to the second revenue type, Lam reported Q3 CSBG (services) revenue of a record $2.1 billion, up 6% sequentially and 25% YoY, as growth in this segment remains exceptional, now bringing in 36% of revenue.
You see, while equipment revenue is limited by available cleanroom space, this is benefiting Lam’s CSBG segment, as customers are increasingly looking to optimize the available space, and the best way to do so is by upgrading their existing equipment to improve output. As a result, Lam saw very strong growth in upgrade revenue, while the expanding installed base also drives steadily growing spares and service revenue, also benefiting from strong factory utilization.
In other words, as customers are eager to upgrade existing equipment and use it more intensively amid high demand, this is driving very strong service revenue growth for Lam.
Dextro Cobots is a great example of such a service innovation that drives higher equipment output and results. It is a collaborative robot (cobot) designed specifically to optimize critical maintenance tasks on wafer fabrication equipment.
It is a mobile unit with a robotic arm that uses various interchangeable end-effectors as hands to perform maintenance tasks that are time-consuming and error-prone when done manually. You think about actions like precisely installing and compressing consumable components with more than twice the accuracy of manual application (improving etch performance at the wafer edge); tightening vacuum-sealing, high-precision bolts to exact specifications, relieving engineers of a repetitive task with up to a 5% manual error rate; and removing sidewall polymer build-up within the chamber without requiring full disassembly of the lower chamber.
Most importantly, customers using Dextro in production are benefiting from higher output and, in some cases, improved yield from existing capacity. Unsurprisingly, adoption has been strong, as it addresses the exact needs of the current market.
The system can now be used on 8 Lam tool types, up from 6 last quarter. Lam also introduced a next generation, packing 10x more compute power than the first generation into a smaller footprint.
This kind of innovation drives excellent growth in an environment where maximizing output and optimizing costs are key.
Ultimately, across both systems and service revenue, Lam delivered excellent growth in Q3, with demand remaining very strong and Lam executing well.
On that note, let’s move to the P&L.
Lam reported a Q3 gross margin of 49.9%, coming in at the high end of guidance and up 80 bps YoY, driven by a favorable customer and product mix as well as improved factory efficiencies.
Further down the line, the company reported operating expenses of $866 million, up 15% YoY, driven by 24% growth in SG&A expenses and 11% growth in R&D, with the latter accounting for 68% of total expenses. The growth in SG&A was mainly driven by higher headcount in the manufacturing and field organizations to support volume growth and the long-term product roadmap.
Positively, with expenses growing slower than revenue, Lam delivered strong operating leverage, also helped by a higher gross margin. The Q3 operating margin came in at 35%, up 190 bps YoY, sitting at the high end of guidance.
Ultimately, this resulted in a Q3 EPS of $1.47, beating the consensus by $0.11 and up 41% YoY, driven by operating leverage and a lower tax rate, reflecting benefits from higher equity compensation vesting. This exceeded the high end of guidance and was much better than what I anticipated.
Finally, Lam reported Q3 CapEx of $332 million, up notably YoY and sequentially, to support investments in a second manufacturing facility in Malaysia, as well as lab-related investments in the United States and Taiwan.
This higher CapEx in Q3 weighed on FCF, which came in at $809 million, down 23% YoY, reflecting a FCF margin of only 14%. This results in a TTM FCF of $6 billion at a 27.7% margin, which remains excellent. Also, management maintains its 2026 CapEx plan at 4-5% of revenue, flat YoY, so I expect FCF to bounce back in the second half of the year and continue to grow meaningfully YoY, with a FCF margin likely exceeding 30% in 2026.
These strong cash flows allowed Lam to keep opportunistically returning cash to shareholders. In Q3, management repurchased $800 million of shares at an average price of $211 and paid $326 million in dividends, representing 139% of FCF. Positively, that is a standout at Lam targets to return 85% of FCF over time.
For reference, Lam has retired 60%+ of its shares since 2013 through buybacks and raised its dividend for 11 consecutive years at a CAGR of 14% — you won’t find many companies that are more shareholder-friendly than this one. Meanwhile, shares now yield only 0.5%, but this does remain well covered by a 19% payout ratio.
Also, Lam sits on a healthy balance sheet that can take a hit. Even as the company retired $750 million in unsecured notes in Q3, it ended the quarter with $4.8 billion in available cash and a total debt of only $3.7 billion, leaving it in a healthy net cash position.
And finally, it is worth highlighting that Lam’s reinvestment metrics are nothing short of sensational, with an LTM ROE of 67% and an LTM ROIC of 52%, both trending up again. Furthermore, ROIC has consistently been above 5x the cost of capital since 2016 and above 35% since 2019.
Those are truly best-in-class numbers that reflect Lam’s ability to generate substantial returns from the cash it deploys.
Overall, there is just nothing bad to say about Lam’s Q3 report. Growth momentum is strong, margins continue to expand, it generates excellent FCF, is in good financial health, and reinvestment metrics are best-in-class. We can’t ask for much more.
On that, let’s move to the real highlight — the outlook!
Outlook & Valuation
