Lam Research: Robust Profitability, Reasonably Valued

Lam Research (LRCX) designs, manufactures, and supplies wafer fabrication equipment and related services to the semiconductor industry. Its products include plasma etch, thin film deposition, wafer cleaning, and photoresist stripping.

LRCX also produces and supplies back-end wafer-level packaging (WLP) equipment for the manufacturing industries. Founded in 1980, with its headquarters in Silicon Valley, California, it has since expanded its reach to Asia and Europe.

The company is competitively positioned in its industry, has substantial growth momentum, and has strong profitability. Despite this, I am neutral on the stock.

Strengths

Lam Research Corporation plays a mission-critical role for large global clients like Kioxia, Intel (INTC), Samsung Electronics, Micron Technology (MU), Yangtze Memory Technologies, SK Hynix, and TSMC (TSM). Its product applications impact the computer, military, aerospace, and communications industries, so it is an indispensable part of the global economy.

Between its strong intellectual property and demonstrated innovative and technical prowess, Lam Research has carved out a powerful competitive position within its industry.

Recent Results

In its fiscal Q2, LRCX generated revenue of $4.23 billion. It posted a U.S. GAAP gross margin of 46.8%, U.S. GAAP operating income as a percentage of revenue of 31.7%, and U.S. GAAP diluted EPS of $8.44.

Meanwhile, its non-GAAP gross margin was 46.8%, non-GAAP operating income as a percentage of revenue came in at 32.0%, and non-GAAP diluted EPS was $8.53. These figures reflected continued excellent performance for the company.

The balance sheet also remained in excellent shape. Cash and cash equivalents, short-term investments, and restricted cash and investments balances increased to $5.6 billion, up $0.7 billion sequentially, despite the company pouring $415 million into share repurchases and $211 million into dividends.

Valuation Metrics

LRCX stock looks slightly undervalued at the moment as its forward EV/EBITDA ratio is 10.9 times compared to its historical average of 11.3 times, and its forward price-to-normalized-earnings ratio is 13.7 times compared to its historical average of 15.3 times.

Wall Street’s Take

According to Wall Street analysts, LRCX earns a Moderate Buy consensus rating based on 12 Buys, six Holds, and zero Sell ratings assigned in the past three months. Additionally, the average Lam Research price target of $737.53 puts the upside potential at 52%.

Summary and Conclusions

Lam Research is a leading semiconductor industry company and has been enjoying robust profitability lately. On top of that, Wall Street analysts are generally bullish on it, and the average price target implies substantial upside potential over the next 12 months.

On the other hand, it operates in a cyclical industry, which makes it extra volatile. As a result, investors might want to consider taking a conservative approach and wait for a larger pullback in the stock price before adding shares here.

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