LRCX Q2 Deep Dive: AI Demand and China Upside Shape Guidance Amid Margin Caution

Semiconductor equipment maker Lam Research (NASDAQ:LRCX) reported Q2 CY2025 results beating Wall Street’s revenue expectations, with sales up 33.6% year on year to $5.17 billion. On top of that, next quarter’s revenue guidance ($5.2 billion at the midpoint) was surprisingly good and 10.8% above what analysts were expecting. Its non-GAAP profit of $1.33 per share was 10.3% above analysts’ consensus estimates.

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StockStory’s Take

Lam Research’s second quarter results came in ahead of Wall Street’s revenue and profit expectations, but the market reacted negatively. Management highlighted strong foundry and NAND performance, pointing to rising demand for advanced chip architectures linked to artificial intelligence (AI) and high-bandwidth memory. CEO Tim Archer emphasized momentum in new etch and deposition products and expanded services, especially as customers upgrade to higher layer NAND and more complex packaging solutions. Management also cited operational efficiency improvements and customer mix as supporting factors.

Looking ahead, Lam Research’s guidance reflects expectations for continued strength in China, ongoing technology transitions, and expansion of advanced packaging. Management believes upcoming investments in gate-all-around transistors and higher layer NAND will drive market share gains, while new service offerings and automation tools are expected to enhance long-term profitability. CFO Doug Bettinger noted that tariffs and product mix changes could weigh on gross margins in future quarters, but the company is focused on leveraging its broad product portfolio to capture incremental opportunities. Archer stated, “We feel confident that Lam is well positioned to outperform as industry drivers work in our favor.”

Key Insights from Management’s Remarks

Lam Research’s quarter was shaped by robust AI-related demand, higher customer spending in China, and progress in advanced packaging and memory upgrades.

• AI and advanced node demand: Management attributed revenue growth to strong uptake of products supporting AI-driven architectures, such as gate-all-around transistors and high-bandwidth memory, which require more complex etch and deposition steps.
• China spending rebound: The company saw an unexpected increase in spending from both domestic Chinese customers and multinational firms operating in China, driven by technology upgrades and efforts to localize manufacturing amid geopolitical uncertainty.
• Advanced packaging momentum: Lam expanded its presence in advanced packaging, with CEO Tim Archer noting a near five-point expected market share gain for the SABRE 3D system in 2025. Advanced packaging helps meet next-generation AI and memory requirements by increasing memory density and improving bandwidth.
• Services and automation progress: The Customer Support Business Group (CSBG) reported its third consecutive record quarter for upgrade revenue, fueled by increased adoption of Equipment Intelligence-enabled cobots and expanded tool coverage, which enhance fab efficiency and maintenance precision.
• Margin expansion and operational execution: Gross margins reached a post-merger high, supported by favorable customer and product mix, as well as ongoing operational improvements. However, management flagged rising tariffs and changing customer mix as potential future headwinds.

Drivers of Future Performance

Lam Research’s guidance is underpinned by expectations for continued AI-driven demand, growth in advanced packaging, and a stable but evolving customer mix.

• Technology transitions drive opportunity: Management believes adoption of new semiconductor architectures—such as gate-all-around transistors and higher layer NAND—will increase demand for Lam’s etch and deposition equipment, as customers shift toward more complex manufacturing processes for AI and data-centric applications.
• Regional and customer mix shifts: The company expects China to remain a significant contributor in the near term, but acknowledges that spending may normalize later in the year. CFO Doug Bettinger cautioned that tariffs and less favorable mix could pressure margins in subsequent quarters.
• Services and automation expansion: Lam is increasing investment in automation and advanced services, including its Dextro cobots and Equipment Intelligence platform, aiming to deliver operational benefits for customers and expand its addressable market. Management expects these initiatives to support long-term revenue growth and customer retention.

Catalysts in Upcoming Quarters

In upcoming quarters, the StockStory team will be watching (1) whether China spending remains elevated or reverts to historical levels, (2) the pace of adoption for Lam’s advanced packaging and gate-all-around products across customer segments, and (3) management’s ability to sustain gross margin improvements despite tariff and mix headwinds. Developments in service automation and customer wins in next-generation memory will also be key indicators.

Lam Research currently trades at $105.48, up from $99.14 just before the earnings. Is the company at an inflection point that warrants a buy or sell? See for yourself in our full research report (it’s free).

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