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Lam Research (LRCX +4%) continues to etch out all-time highs, popping today after topping metrics across the board in Q2 (Dec), including a seventh straight double-digit earnings beat. There were many reasons to be optimistic ahead of the semiconductor equipment firm's Q2 report, including cheerful guidance from Taiwan Semi (TSM) last week and record orders in DecQ from peer ASML (ASML) yesterday. However, by that same token, there were reasons to be cautious as recent upbeat developments set a high bar for LRCX to clear.

Still, with the powerful momentum behind it, LRCX surpassed raised expectations easily. Also, for the most part, LRCX is out of the woods regarding its many challenges over the past two years and is better positioned to capitalize on a new growth cycle in the chip industry.

• LRCX is jumping off a higher and more structurally sound foundation ahead of what it sees as the beginning of a new growth cycle within semiconductors. Since 2019, LRCX has expanded its total non-memory revenue share, ended CY23 with a nearly 50% larger installed base, and, through aggressive operational efficiency improvements, has delivered operating margins almost 250 bps higher than the prior cycle's trough.
• These advancements were notable in Q2. LRCX delivered a 13% bump in adjusted EPS sequentially to $7.52 and an 8% improvement in revs since Q1 (Sep) to $3.76 bln, its second consecutive quarter of sequentially improving numbers. Operating margins were flat qtr/qtr at 30% but still topped the midpoint of LRCX's 28.5-30.5% forecast.
• Wafer fab equipment (WFE) spending, the primary gauge on overall demand for LRCX, ended 2023 in the low $80 bln range, moderately higher than management expected due to decent strength from China. However, zooming out, overall memory WFE spending plunged by 40% yr/yr in 2023, led by cuts in NAND (flash memory) spending of over 75%, painting a picture of just how turbulent the previous year has been.
• Entering 2024, LRCX is not anticipating a major uptick in WFE spending, projecting around the mid-to-high $80 bln range, a modest recovery compared to 2023. Management echoed ASML and Micron's (MU) remarks, expecting a muted year ahead. This is reflected in its Q3 (Mar) outlook, targeting adjusted EPS of $6.50-8.00 and revs of $3.4-4.0 bln, both roughly flat sequentially.
• However, also like ASML and MU, LRCX is remarkably bullish over outsized growth following this year's recovery. The company expects semiconductor revs to reach $1.0 trillion combined by the end of 2029 due to rising device manufacturing complexity, prompting WFE spending to roughly double compared to today's levels.

The forward-looking market is shrugging off a likely stagnant year ahead for LRCX and zoning in on rapid growth come CY25. It is important to note that LRCX is now one of several semiconductor firms expressing enthusiasm over promising demand in 2025. Given this level of conviction from the industry, investors feel confident enough to buy now in anticipation of catching the beginning of the next growth cycle.