About Lam Research
Who says one cannot become wealthy through academia?
Boof, we say to that, as the founder of Lam Research, David K. Lam himself started out doing rather intense and insightful research within the nuclear physics arena throughout the course of completing his undergraduate degree, then proceeding to earn his M.S. degree and a Sc.D. degree in chemical engineering from the University of Toronto.
Eventually, he just so happened to scratch his entrepreneurial inch and after a great deal of time and effort, David Lam founded Lam Research, a Fremont, California-headquartered company that, really, the semiconductor industry as we know it today relies on deeply.
The best way to generally describe what Lam Research does is that it makes the machines that in turn make the semiconductor chips we use ourselves and rely on every single day.
Specifically, the company is in the business of manufacturing and selling wafer-fabrication equipment, which is pretty much among the most critical design and operational components of successfully putting together a semiconductor, allowing its clients the ability to effectively and efficiently assemble their chips and push them out to the market.
In order for a little more context, some of Lam’s largest customers include the likes of semiconductor giants Intel, Samsung, Micron Technology, Nvidia, GlobalFoundries, Sony, Taiwan Semiconductor Manufacturing Company (TSMC), among others, ultimately competing with the likes of Applied Materials, ASML, KLA, Tokyo Electron Limited, and a handful of others near or at the level of scale, production and product expertise and focus as Lam Research.
With all of the recent talk and development of artificial intelligence (AI), not to mention the mix of companies and their associated stocks that have blown the roof off of their share prices over the last year or so, Lam Research has found itself along for the ride, with its share price skyrocketing somewhere in the neighborhood of 58% over this last one year’s span of time alone, largely a byproduct of hype surrounding artificial intelligence but also largely due to intrinsic, tangible heightened demand for companies such as Lam, designing and bringing to market the specialized, highly technological machines that help chip companies do what they do best, and make chips, and as demand for said products continues rising, the aforementioned clients will need equipment suppliers such as Lam Research, probably more than ever before, of course, benefiting who else but Lam.
Now, we think it is worth briefly mentioning that it is our perspective that Lam will ebb and flow with the supply and demand boons and sensitivities felt by and heavily reverberated by the greater overall semiconductor sector, so, yes, while the gettin’ is still good Lam Research is more than likely going to continue benefiting from the chip boom, there will certainly be periods of softening demand, or even merely reports thereof, which will more than likely move Lam’s share price (NASDAQ: LRCX) southbound, along with other semiconductor companies.
This is just a brief word of supply and demand caution, as like anything on earth, things aren’t always rosy, even though we are presently living in a sort of honeymoon phase for Lam Research and chip equipment manufacturers and suppliers alike.
The music always stops playing at some point.
In keeping all of this in the back of your mind, let’s learn more about Lam through a more objective, financial lens, so as to ultimately determine whether or not this company’s stock is worth buying, even though it is trading near all-time highs, and holding as a (potentially) strategic, forward-looking, long-term investment for the ages.
Lam’s stock financials
First and foremost, Lam Research’s share price is currently at a whopping $796.58 with a corresponding market capitalization of $104.98 billion along with a present price-to-earnings (P/E) ratio of 27.02 all while also dishing out an annual dividend of $8.00 per share.
Given these preliminary figures, Lam’s share price appears to be modestly overvalued with respect to its intrinsic value, as it is commonly asserted that a price-to-earnings ratio of 20 implies that a company’s stock is trading at exactly fair value, or what it is said to be worth paying for today, and using this line of reasoning, Lam’s stock (NASDAQ: LRCX) is trading a little ahead of itself, however, a caveat in this arena is if the company in question is experiencing some strong, sizable and consistent growth (primarily on the revenue front), and we presume that Lam is indeed generating some rather promising year-over-year (YOY) growth in this regard.
We will verify this to be the case, of course.
Additionally, the company does pay out a comforting annual dividend to its shareholder base, leading us to believe that this company is exceedingly confident in its ability to continue issuing this dividend in the years to come, which makes us happy campers, but, again, we will verify this to be the case when we peer over at the overall condition of the company’s cash flow statement and its trailing twelve month (TTM) net profit margin as well.
However, before we get too ahead of ourselves, let’s check out Lam Research’s balance sheet.
More specifically, Lam’s executive team is at the helm of and responsible for around $18.7 billion in terms of total assets as well as approximately $10.5 billion in terms of total liabilities, which, all things considered, is a great overall balance sheet breakdown, as the company has a lot of equipment to put together and additional moving parts (literally), and even with all of the recent industry demand and growth within, this company’s management team has been able to keep the books balanced towards the total asset side of things rather than the total liabilities side of things, in a resounding sense at that.
This really is an excellent base off of which this company can continue operating upon.
With respect to the company’s income statement, Lam Research’s recent annualized revenue figures have been trending to the right and towards the sky, as we had initially presumed, specifically starting off at a base of $9.6 billion (as reported in 2019), just north of $10 billion (2020), $14.6 billion (2021), $17.2 billion (2022), leading up to its most recently displayed and reported revenue figure of $17.4 billion, as reported in June of 2023.
The year-over-year (YOY) revenue is there, obviously, and it isn’t hard to find that the company’s revenues jumped in a meaningful way between 2020 and 2021, following the boom in chip demand, and in the years that followed, while it is technically true that the company’s revenues have grown each and every year, I’d still say the figures between and during 2022 and 2023 show a degree of deceleration, which simply speaks to our previously mentioned point(s) regarding the company’s relative sensitivities to the greater overall demand for chips, which, as we have already seen, can fluctuate a good deal, even during boom periods.
We aren’t exactly concerned, however, just making our point by means of the available revenue numbers.
Moving right over to the company’s cash flow statement, it can also be found that Lam Research’s net income has also been growing at a rather notable rate, standing at nearly $2.2 billion in 2019, reaching its highest recent report of $4.6 billion in 2022, which is yet another positive for Lam Research found in our research (come on, that was slightly funny), not to mention that its total cash from operations have been resoundingly positive, implying that this company is pretty darn good at generating cash from its sales, which makes sense on a general basis in the sense that semiconductor companies (again, Lam Research’s customers) are both willing to pay top-dollar for the quality product and equipment Lam sells and also that a company such as Lam is perhaps able to tack a bit more of a premium given just how crucial and mission critical these machines are to the aforementioned companies.
Lam’s stock fundamentals
As it relates to the company’s trailing twelve month (TTM) net profit margin, at least how it is displayed on TD Ameritrade’s platform, Lam’s can certainly be characterized as being competitive with the industry’s overall average, even though it lags ever so slightly behind, for instance, as its TTM net profit margin is listed as being 25.08% in comparison the industry’s average of 27.04%, and given how few operators and just how competitive the semiconductor equipment manufacturing segment of the chip space is, this slight discrepancy isn’t going to give us any nightmares, as Lam’s TTM net profit margin is still well in-line with the industry, and as long as that remains to be the case, we are going to sleep just fine at night.
Regarding the company’s TTM returns on the spectrums of both assets and investment(s), as also found on TD Ameritrade’s platform, Lam’s figures in these arenas have once again remained cordially competitive, with, for example, Lam’s TTM return on assets (think equipment and capital that the company uses across the board to put its machines together) is registered at 21.32% to the industry’s respective average of 21.89%, evidently posing a sort of negligible discrepancy between the company and the industry (on average), of course, once again directly speaking to the competitiveness between Lam and its competitors, and we are simply glad to find that this company is holding its ground quite well in relation to other equipment manufacturers and developers within the industry.
Should you buy Lam Research stock?
While keeping the inherently cyclical nature of the semiconductor industry as a whole in the back of one’s mind, in primarily referencing this company’s core financial figures alone, Lam Research is riddled with far more pros than cons, with its excellent, total asset-heavy balance sheet, its largely growing recent annual revenue figures, its consistent and positive cash flows, its seemingly stable and sizable annually distributed dividend and its comfortably comparable TTM net profit margin and core TTM return metrics as they relate to the industry’s respective listed averages.
Nevertheless, given the monstrous and impressive run-up this company’s stock (NASDAQ: LRCX) has had over the last one year’s span of time alone, we feel as though we would be chasing the stock and massively reducing our potential upside while inordinately sizing up our risk at an uncomfortable rate, and thus we don’t think it wouldn’t be the worst idea for those who have been on the ride thus far to continue to “hold,” and for those who have missed the Lam Research Express, to remain on the sidelines until the artificial intelligence wave washes up on shore, bringing down its share price to more favorable, investable levels.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.
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