Lam Research (LRCX) and KLA Corporation (KLAC)

Asset allocation has always been a key focus in portfolio management, but positioning within a single asset class is equally critical for navigating today’s volatile markets. Three weeks ago, when Trump announced reciprocal tariffs, markets experienced a sharp sell-off, particularly in the semiconductor sector, which had been widely overweighted. As of April 28, the S&P 500 (SPX) and Nasdaq 100 (NDX) remained down -4.27% and -3.98% over the past month, respectively. From our point of view pullback has now created an attractive opportunity to reassess and reposition current holdings.

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Capital flow Observations

From what we have seen in terms of fund flows, hedge funds continued their buying of US equities for the third consecutive week, primarily fuelled by the macro products (drop in WTI and Brent), airlines and cruise lines saw a mild rebound. Likewise, Financials and Real Estate were among the top net purchases, largely due to new long positions. In contrast, Tech sector still faced significant net selling. On the other hand, long only funds (LOs) were net buyers last week with emerging signs of LOs’ demand in mega-cap tech and semiconductors, showing an improving supply-demand balance, with some stabilization after recent declines.

In the past few weeks, institutional investors like hedge funds and LOs, have been actively rebalancing portfolios, implying the importance of proactive positioning - regardless high-net-worth or individual investors. Active portfolio management is critical in the current dynamics environment, particularly as reciprocal trade policies remain only partially executed. While the primary effects of tariffs on Canada, Mexico, and China have already rippled through markets (impacting sectors like agriculture, autos, and technology), further retaliatory measures could amplify volatility – though we do not expect the full effect to be in place. This phased rollout of trade measures means investors must stay agile, trimming overexposed positions, hedging downside risks, and identifying sectors poised to benefit from shifting supply chains. For individual investors, mirroring institutional discipline, rather than reacting after the fact, like chasing the ceiling rally and selling in the bottom.

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Our Convictions

This month has seen dramatic market swings, even among high-quality stocks. In such an environment, selecting conviction stocks has become more important than ever. With heightened volatility and ongoing uncertainties under the Trump administration, investors need faith in their picks to weather the turbulence. Below, we share our conviction and the rationale behind our current high-conviction holdings: Lam Research and KLA Corporation.

- Lam Research (LRCX US)

Lam Research is a major player in the manufacturing of machines used to produce computer chips. The company specializes in equipment for three critical semiconductor processes: etching (carving microscopic circuit patterns), deposition (adding ultra-thin material layers), and wafer cleaning between steps.

Lam supplies its tools to all the major chipmakers, including Samsung, TSMC, Micron, SK Hynix, and Intel. Its equipment is vital for producing advanced memory chips and next-generation processors. While the semiconductor industry is inherently cyclical, Lam has maintained strong business performance driven by rising demand for chips across smartphones, data centers, and other applications. Despite challenges such as trade restrictions and market fluctuations, Lam remains essential to enabling the industry’s ongoing push toward smaller, faster, and more powerful chips.

Cutting-Edge Technology

Our conviction in Lam Research (LRCX) is grounded in its ability to stay in the forefront of the cutting-edge technology, attractive relative valuation, and strong fundamentals. We believe LRCX will continue to lead the industry in etching and deposition processes. The company is at the technology inflections in the foundry space, particularly in enabling 2nm semiconductor production. Its expertise in etch and deposition for advanced memory cell solutions gives it a competitive edge that we believe AMAT cannot yet replace. This technology powers the next generation of innovation.

As demand surges for AI, virtual reality, electric vehicles, and other data-intensive applications, LRCX is pushing the boundaries with breakthroughs such as High Bandwidth Memory (HBM). This transformative technology stacks memory chips vertically in 3D structures using advanced packaging techniques, delivering unmatched speed and energy efficiency.

Additionally, Lam is a key player in the 200+ layer NAND flash memory market, leveraging its industry-leading precision in etching and deposition. As NAND manufacturers move beyond 200 layers to improve storage density and cost efficiency, Lam’s tools provide the atomic-level control needed to vertically stack memory cells without defects. This enables chipmakers to improve yields, ensure reliable interconnects, and meet the growing demand for advanced memory in AI, data centers, and consumer electronics. Lam’s technological leadership firmly positions it at the forefront of this high-growth segment.

Fundamentals

In Q3 FY25, revenue increased by 24.4% year-over-year and 7.9% quarter-over-quarter. The company also achieved a record-high gross margin, reflecting strong cost control alongside significant sales growth. On the profitability side, the company posted a record-high EBITDA margin of 34.5%, highlighting operational efficiency and a resilient business model. Net margin reached 27.5%, in line with the average of recent quarters. We expect the company to sustain its growth trajectory while maintaining tight control over costs and operations which will help them weather the impact of tariffs to a large extent. Notably, foundry-related revenue grew by over 37%, further reinforcing the company’s market leadership in this segment.

From a valuation perspective, the company appears to remain competitive. Its EV/Sales ratio stands at 5.24x, indicating healthy sales activity, while its EV/EBITDA is 15.84x, broadly in line with industry standards and slightly better than AMAT’s 14.05x. We view EV/EBITDA as a more appropriate metric for valuing companies with significant capital investment in equipment. Although its EPS is lower at 1.04 compared to AMAT’s 2.13, its forward P/E of 16.9x versus the current 19.84x (AMAT: 16.8x forward vs. 16.03x current) suggests that investors maintain an overweight view of the company’s future earnings potential rather than AMAT.

In summary, we prefer LRCX over AMAT due to its stronger focus on cutting-edge technology, particularly in deposition, giving it an edge in advanced semiconductor equipment. Unlike AMAT, which is more diversified, LRCX is more like a pure play, allowing deeper specialization in high-growth segments. Additionally, with a market cap of 90.69B (vs AMAT 121.5B), LRCX has greater growth potential, especially as demand for precision semiconductor tools increases. Its tech leadership and focused strategy make it a more compelling investment.

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KLA Corporation (KLAC US)

KLA serves as the semiconductor industry’s essential quality guardian, providing advanced inspection and metrology tools that chipmakers rely on to detect microscopic defects and maximize production yields - core to semiconductor process control. As transistors shrink to 3nm and below, powering everything from AI chips to smartphones, KLA’s precision technology becomes increasingly critical, with no competitor matching its accuracy. The company benefits from strong pricing power and recurring revenue, resulting in high margins and consistent profitability. With the rise of AI-driven manufacturing and increasingly complex chip designs, KLA’s role as the industry’s “defect detective” ensures it remains a cornerstone of semiconductor innovation.

Our conviction is grounded in two perspectives: KLA’s indispensable market position and its strong fundamentals. Its client base includes virtually every major technology and AI chip company, TSMC, Samsung, Intel, Micron, and others, underscoring its critical role in the semiconductor manufacturing lifecycle, particularly in wafer inspection. While the company’s performance is highly linked to the growth of the AI sector, we believe AI infrastructure will see double-digit growth over the next five years. As AI demand grows, the need for robust AI infrastructure, and KLA’s tools, will grow alongside it.

Fundamentals

With the factors mentioned above, the company holds a strong client base and occupies a unique position in the market. It has generated constant earnings’ growth amid the rise of AI. In Q4 FY24, the company reported $3.08 billion in revenue, reflecting 23.7% year-over-year growth. Even more notable were its gross margin of 61.7% and EBITDA margin of 46.1%, highlighting exceptional cost control and a robust business model. Valuation also reasonable compared with peers given KLA is a pure play inspector, with an EV/Sales ratio of 8.64x and an EV/EBIT of 24.37x. Growth rate also the outstanding one among its peers.