Are Applied Materials & Lam Research Overlooked?

Applied Materials and Lam Research are not overlooked by professional semiconductor investors, but they are frequently overshadowed by more famous chip names like Nvidia and TSMC. These two companies are foundational suppliers of the wafer fabrication equipment (WFE) that every advanced chip requires, making them critical, diversified picks for anyone tracking the semiconductor supply chain.

Formula

This simple model compares the future value of a dollar invested in a growing earnings stream (like a semiconductor equipment company) against the present value of a dollar discounted at your required rate of return. The formulas are:

• Future value factor = (1 + g/100)^t, where g is the expected annual earnings growth rate (in %) and t is the number of years.
• Present value factor = 1 / (1 + r/100)^t, where r is your discount rate (in %), reflecting the risk or opportunity cost of capital.
• Growth vs. discount ratio = Future value factor ÷ Present value factor. A ratio above 1 suggests the growth outlook more than compensates for the time value of money and risk.

Worked Example

Using the default values from the calculator (5-year horizon, 15% annual growth, 10% discount rate):

1. Future value factor = (1 + 15/100)⁵ = (1.15)⁵ = 2.0114.
2. Present value factor = 1 / (1 + 10/100)⁵ = 1 / (1.10)⁵ = 1 / 1.6105 = 0.6209.
3. Ratio = 2.0114 / 0.6209 = 3.24.

The calculator shows a future value of $2.01 per $1 invested, a present value of $0.62 per $1, and a ratio of 3.24. The ratio above 1 indicates that the assumed growth rate more than offsets the discount rate over the period.

Why These Two Names Specifically?

Applied Materials (AMAT) and Lam Research (LRCX) are the two largest U.S.-based suppliers of wafer fabrication equipment. They are not “picks and shovels� in a metaphorical sense—they literally build the machines that etch circuits, deposit thin films, and polish wafers. Without their tools, no advanced chip can be made. While Nvidia designs the chips and TSMC manufactures them, AMAT and LRCX provide the equipment that TSMC and others use in their fabs. This makes them essential, recurring-revenue businesses: fabs must constantly buy new tools for each technology node, and they also buy spare parts and services for existing tools.

How the Business Model Works

Both companies generate revenue from three streams:

• New equipment sales: The bulk of revenue, driven by new fab construction and technology upgrades. Each new node (e.g., 5nm, 3nm) requires more equipment per wafer than the previous node.
• Services and spare parts: Recurring revenue that grows as the installed base of tools grows. This provides stability during cyclical downturns.
• Used equipment sales: A smaller but consistent segment, as older fabs continue to operate for mature chips.

The key metric is WFE (wafer fab equipment) spending, which is the total amount chipmakers spend on tools in a year. AMAT and LRCX together capture roughly a quarter to a third of the global WFE market, which historically has been $70–$100 billion annually.

Are They Actually Overlooked?

In the financial press, they are not overlooked—analysts cover them heavily, and they are components of major semiconductor ETFs. However, they are often underappreciated by retail investors who focus on high-profile chip designers. The misconception is that equipment makers are simple “cyclical commodit� businesses. In reality, they have pricing power because their tools are highly specialized and often custom-built for each customer. They also benefit from long-term secular trends: AI accelerators, electric vehicles, 5G, and IoT all require more chips, and each new chip requires more manufacturing steps, which means more equipment per wafer.

Key Risks and Common Misconceptions

The biggest risk is cyclicality. Chipmakers can delay or cancel equipment orders when demand drops. This happened in 2019 and again in 2023, when memory prices crashed. However, both companies have diversified into logic and foundry, which have been more stable. Another misconception is that they are “too big to grow.� In reality, their growth is tied to the number of process steps, not just the number of wafers. For example, a 3nm chip requires about 20% more process steps than a 5nm chip, so even if wafer volume stays flat, equipment revenue can grow.

How to Evaluate Them as Investments

When comparing AMAT and LRCX, look at these factors:

• Revenue mix: LRCX has heavier exposure to memory (DRAM and NAND), while AMAT is more balanced across logic, foundry, and memory. Memory is more volatile.
• Technology moat: Both spend heavily on R&D (about 10-15% of revenue) to stay ahead of competitors like Tokyo Electron and ASML.
• Customer concentration: Both count TSMC, Samsung, and Intel as major customers, but no single customer accounts for more than 10-20% of revenue.
• Balance sheet: Both have strong balance sheets with low debt and high cash flow, allowing them to return capital via buybacks and dividends.

Use the calculator above to quickly model whether a given growth assumption justifies your required return. For example, if you expect 15% annual earnings growth for five years and require a 10% return, the ratio of 3.24 suggests the growth is more than sufficient. If you lower growth to 5%, the ratio falls to about 1.0, meaning the stock is fairly valued only if you accept a 5% return.

Frequently Asked Questions

Are Applied Materials and Lam Research the same company?

No. They are separate, competing firms. Applied Materials is the larger of the two by revenue, with a broader product portfolio including deposition, etching, and ion implantation. Lam Research specializes primarily in etching and deposition, particularly for memory chips. They often compete in the same categories but have different strengths.

Do they pay dividends?

Yes, both pay quarterly dividends and have a history of increasing them. They also repurchase shares, which boosts earnings per share. However, the yield is typically modest (around 1-1.5%), so they are not income stocks but rather growth stocks with a small income component.

What is the biggest risk to their growth?

The biggest risk is a prolonged downturn in chip demand, especially in memory, which is LRCX’s largest segment. Another risk is geopolitical tension: export controls on advanced equipment to China could reduce sales, though both companies have navigated such restrictions by adapting their product offerings.

How do they compare to ASML?

ASML has a near-monopoly on EUV lithography, which is essential for the most advanced nodes. AMAT and LRCX do not compete with ASML in lithography; they complement it. In fact, ASML’s EUV tools create a need for more deposition and etch steps, which benefits AMAT and LRCX. So they are not direct competitors.

Should I buy them instead of Nvidia?

That depends on your risk tolerance. Nvidia has higher growth potential but also higher volatility and valuation. AMAT and LRCX offer more diversified exposure to the entire semiconductor industry, not just AI. They are less likely to triple in a year but also less likely to crash if AI demand slows. Many investors hold both.

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in t | Time horizon (years) | years | 5 | 1 | 30
in g | Expected annual growth | % | 15 | -50 | 100
in r | Discount rate | % | 10 | 0 | 50
out fv | Future value per $1 | $ | (1 + g/100)^t | 2
out pv | Present value per $1 | $ | 1 / (1 + r/100)^t | 2
out ratio | Growth vs. discount ratio | - | ((1 + g/100)^t) / ((1 + r/100)^t) | 2