Micron’s $100 billion splurge could strengthen this stock

Micron Technology (mu -1.79%) The memory industry is currently facing severe headwinds due to the downturn, but that hasn’t stopped chipmakers from thinking big.

Memory experts revealed in October. 4 It will spend $100 billion over the next few decades to build a large manufacturing plant in upstate New York. Once completed, it will be the largest semiconductor factory in the United States, and in the long run will help Micron meet booming demand for memory chips. Micron expects to spend $20 billion in planned investments by the end of the decade.

If you’re wondering how to take advantage of Micron’s splurge, check it out Lamb Study (LRCX -0.94%). In the long run, the semiconductor equipment supplier could win big from Micron’s ambitious investment plan. Let’s see how.

Lam Research focuses on memory manufacturing equipment

Lam Research makes equipment used to make integrated circuits and derives most of its revenue from supplying the equipment to memory makers. Specifically, 54% of Lam’s revenue came from its memory business in the quarter ended June.

The strong reliance on the memory business was a key reason for Lam’s strong quarter. The company’s revenue rose 12% year over year to $4.64 billion. Adjusted earnings rose to $8.83 per share from $8.09 per share a year earlier.

An oversupply in the memory industry will weigh on Lam’s performance in the near term as manufacturers slash capital expenditure budgets in response to a downturn. However, investors shouldn’t lose sight of the forest for the trees — the memory market should thrive in the long run, which is why Micron has ambitious investment plans.

Lam Research counts Micron as one of its “most important customers,” along with other memory industry players such as Samsung, SK Hynix and Kioxia. Lam did not specify how much revenue it received from supplying equipment to Micron. But the company’s relationships with major memory makers suggest its products are critical to companies like Micron.

So in the long run, Micron’s ambitious spending plans will be a catalyst for Lam Research. But that’s not the only reason to buy the stock. Micron estimates that the combined DRAM (dynamic random access memory) and NAND flash market revenue will reach $330 billion by 2030. That would be more than double last year’s $161 billion in revenue.

Meanwhile, third-party estimates from market research firm Imarc Group paint a more optimistic picture. The company expects the memory chip market to generate $410 billion in revenue by 2027, up from $154 billion last year. It’s no surprise that the memory market is expected to take off in the long run. After all, more memory will be deployed in applications ranging from data centers to smartphones to cars.

For example, the arrival of 5G smartphones has led to a dramatic increase in the average memory capacity per smartphone. Increased levels of automation could lead to a 30-fold increase in DRAM consumption in vehicles and a 100-fold increase in NAND deployment.

As a result, memory makers such as Micron will have to increase investment in equipment to meet growing end-market demand. This bodes well for Lam Research, as Micron’s announcement could spur action by other memory market players and expand addressable opportunities for the former.

Investors must be patient

Investments in memory manufacturing capabilities by companies like Micron will not bring immediate benefits to Lam Research. We have seen that the memory market is currently in a state of oversupply, which is why manufacturers are cutting capex.

That’s why investors must be patient with Lam Research, as end-market opportunities will take time to materialize, and the recent turmoil in the memory industry could weigh on the company’s stock price. However, if it falls further, investors may consider adding to Lam shares.

The stock currently trades at just 10.7 times trailing earnings and 9.3 times forward earnings, so investors may have an opportunity to buy it at a very low valuation due to a softening memory market. Lim can reward patient investors with a respectable dividend yield of 1.74%, which seems sustainable given its payout ratio of less than 19%.

All of this makes Lam Research ideal for investors looking to capitalize on growth in memory spending in the long run, but they should also prepare for near-term volatility in the stock.

Harsh Chauhan has no position in any of the above stocks. The Motley Fool has a position at Lam Research and is recommended. The Motley Fool has a disclosure policy.

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