Thematic evaluation
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Lam Research Corp. (LRCX)

October 15, 2024

Compared to: KLA Corp. (KLAC) | Applied Materials, Inc. (AMAT) | Industrial Select Sector SPDR Fund (XLI)

Our reasoning

Lam Research appears moderately undervalued based on its strong financial performance, market leadership in semiconductor manufacturing equipment, and growth potential in AI-driven semiconductor demand. The company's valuation multiples are below industry averages despite superior profitability metrics and robust free cash flow generation, suggesting the market may be underestimating its future growth prospects and resilience to industry cyclicality.

Key takeaways
  • Lam Research is a leading player in the semiconductor equipment market, but faces challenges from cyclical industry trends and intense competition.
  • The company's financial performance has been mixed, with declining revenue but strong profitability and cash flow generation.
  • Lam Research is investing heavily in R&D and strategic initiatives to capitalize on long-term growth opportunities in advanced semiconductor manufacturing.
  • The company's valuation is currently below its peers, but its strong fundamentals and growth potential suggest potential for future appreciation.
  • Investors should carefully consider the company's high risk profile, which is driven by industry cyclicality, competitive pressures, and geopolitical uncertainty.
  • Lam Research's future performance will be influenced by the strength of the semiconductor industry, the company's ability to execute its strategic initiatives, and the success of its investments in new technologies.
  • Despite the challenges, Lam Research's strong fundamentals, growth potential, and commitment to shareholder returns make it a potentially attractive investment for investors with a long-term horizon and a high risk tolerance.
Undervalued
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Evaluation summary

  1. Company Overview:

    • Lam Research Corporation is a leading global supplier of semiconductor manufacturing equipment and services, specializing in deposition, etch, and clean technologies. The company's products and services are essential for the fabrication of advanced semiconductor devices used in various electronic products, including mobile phones, PCs, servers, wearables, automotive, and data storage. Lam's customer base comprises leading semiconductor memory, foundry, and integrated device manufacturers (IDMs) worldwide.
    • Lam Research's revenue is primarily generated from the sale of wafer fabrication equipment, with a significant portion also coming from the Customer Support Business Group (CSBG), which provides services to maximize installed equipment performance and efficiency. The company's revenue is segmented by product category, with deposition, etch, and clean technologies representing the majority of sales.
    • Lam Research's target market is the global semiconductor industry, which is characterized by rapid technological advancements and increasing demand for more powerful and cost-efficient semiconductors. The company's focus on enabling advanced semiconductor manufacturing processes through innovation and close customer collaboration positions it well to capitalize on long-term industry trends.
    • For comparative analysis, we will be using the Industrial Select Sector SPDR Fund (XLI) as a benchmark and KLA Corp. (KLAC) and Applied Materials, Inc. (AMAT) as industry peers.

  2. Financial Performance:

    • Lam Research's revenue has been declining in recent quarters, primarily due to weakness in the non-volatile memory market, partially offset by strength in DRAM. However, the company's profitability has remained strong, as evidenced by high return on average assets (ROA), return on average total equity (ROE), and return on average invested capital (ROIC).
    • The company's gross margin has been relatively stable, with slight fluctuations due to changes in customer mix and material costs. Operating expenses have increased in recent quarters, driven by higher employee-related costs, increased spending on transformational activities, and higher deferred compensation plan-related costs.
    • Lam Research's ROA, ROE, and ROIC are significantly higher than the industry average, suggesting that the company is more efficient at generating profits. However, these metrics have been declining in recent quarters, reflecting the weakness in the non-volatile memory market.
    • Compared to its peers, KLAC and AMAT, Lam Research has consistently underperformed in terms of revenue growth and profitability. However, the company has exhibited lower volatility than AMAT, suggesting a potentially lower risk profile.

  3. Operational Efficiency:

    • Lam Research's balance sheet analysis reveals a strong liquidity position, with high current and quick ratios. The company's working capital management has been efficient, with stable operating cash flow trends. However, the company's short-term liquidity position is slightly lower than the industry average.
    • The company's cash flow from operations has been decreasing in recent quarters, reflecting the decline in sales and profitability. Cash flows related to the acquisition and disposal of long-term assets have also been decreasing, indicating a reduction in capital expenditures or a decline in investment activity.
    • Lam Research's free cash flow generation has been strong, providing the company with the capacity to repay debt, increase dividends, and invest in organic growth opportunities. The company's free cash flow margin has been relatively stable, indicating efficient cash flow management.
    • The company's capital expenditure analysis reveals a decreasing trend in recent quarters, reflecting a more conservative approach to investment. Depreciation trends have been relatively stable, indicating a consistent level of asset utilization.
    • Lam Research's dividend and share repurchase activities have been consistent, reflecting a commitment to shareholder returns. However, these activities have been decreasing in recent quarters, reflecting the company's focus on managing its cash flow during a period of market uncertainty.
    • Compared to its peers, Lam Research has exhibited lower asset utilization efficiency, as evidenced by higher inventory levels and lower ROA. However, the company's debt-to-equity and leverage ratios are lower than its peers, suggesting a more conservative capital structure.

  4. Growth Opportunities:

    • Lam Research is actively pursuing growth opportunities in the semiconductor industry, driven by the increasing demand for advanced semiconductor devices. The company is investing in new etch and deposition capabilities to address the complex semiconductor requirements of the growing AI environment.
    • The company is also expanding its global manufacturing and supply chain footprint to improve responsiveness and cost reduction. Lam Research's strategic focus on enabling advanced semiconductor manufacturing processes through innovation and close customer collaboration positions it well to capitalize on long-term industry trends.
    • The company's R&D pipeline is robust, with a focus on developing new technologies to address the challenges of advanced semiconductor manufacturing. Lam Research is also actively pursuing strategic acquisitions to expand its product portfolio and market reach.
    • The company's management has a track record of successfully executing strategic plans, as evidenced by its consistent financial performance and market leadership. However, the company's recent restructuring plan and business transformation initiatives may not achieve the expected benefits.

  5. Risks and Threats:

    • Lam Research faces risks from the cyclical and highly competitive nature of the semiconductor capital equipment industry. The company's sales are concentrated among a limited number of large customers, exposing it to their actions and demands.
    • The company's reliance on international sales and global operations exposes it to risks related to trade restrictions and tariffs. The company's restructuring plan and business transformation initiatives may not achieve the expected benefits.
    • The company's investments in new etch and deposition capabilities to address the complex semiconductor requirements of the growing AI environment may not be successful. The company's financial performance is also sensitive to macroeconomic conditions and potential declines in the overall semiconductor market.
    • Compared to its peers, Lam Research faces similar risks related to industry cyclicality, competition, and geopolitical uncertainty. However, the company's lower debt levels and strong cash flow generation provide some cushion against potential downturns.

  6. Valuation Analysis:

    • Lam Research's valuation metrics, such as P/E ratio and EV/EBITDA, are currently below the industry average, reflecting the company's recent underperformance and market uncertainty. However, the company's strong profitability and cash flow generation suggest that its valuation may be undervalued.
    • Compared to its peers, Lam Research's valuation is currently lower, reflecting its underperformance and higher risk profile. However, the company's strong fundamentals and growth potential suggest that its valuation may improve in the future.
    • Potential catalysts for Lam Research's valuation include a rebound in the non-volatile memory market, successful execution of its strategic initiatives, and continued growth in the semiconductor industry.

  7. Price Performance:

    • Lam Research's stock price has been declining in recent months, reflecting the weakness in the semiconductor industry and the company's underperformance. The stock's volatility has been higher than the benchmark, XLI, indicating a higher risk profile.
    • Compared to its peers, KLAC and AMAT, Lam Research's stock price has consistently underperformed. However, the company's stock has exhibited lower volatility than AMAT, suggesting a potentially lower risk profile.
    • The stock's beta has been above 1, indicating that it is more volatile than the overall market. This suggests that Lam Research's stock price is more sensitive to market movements and may experience larger price fluctuations during market swings.

  8. Future Outlook:

    • Lam Research's management has provided guidance for the September 2024 quarter, indicating a slight improvement in revenue and profitability. The company expects WFE spending to be in the mid-$90 billion range in 2024, with growth in foundry, logic, DRAM, and NAND.
    • Analyst estimates for Lam Research's future performance are mixed, with some analysts expecting a rebound in the company's financial performance and others remaining cautious. The consensus view is that the company's financial performance will improve in the near term, driven by the expected rebound in the semiconductor market.
    • Key factors that will influence Lam Research's future performance include the strength of the semiconductor industry, the company's ability to execute its strategic initiatives, and the success of its investments in new technologies.

  9. Summary:

    • Lam Research is a leading global supplier of semiconductor manufacturing equipment and services, with a strong financial performance and a robust growth strategy. However, the company faces risks from the cyclical and highly competitive nature of the semiconductor capital equipment industry.
    • The company's recent underperformance and market uncertainty have led to a lower valuation and a declining stock price. However, Lam Research's strong fundamentals and growth potential suggest that its valuation may improve in the future.
    • Key factors to monitor include the strength of the semiconductor industry, the company's ability to execute its strategic initiatives, and the success of its investments in new technologies.
    • Lam Research's investment profile is characterized by a strong financial performance, a robust growth strategy, and a high risk profile. The company's valuation is currently below the industry average, but its strong fundamentals and growth potential suggest that its valuation may improve in the future.
Peer fundamentals 
Fundamentals
Insights
  • Lam Research is a leading global supplier of semiconductor manufacturing equipment and services, with a focus on deposition, etch, and clean technologies that enable advanced semiconductor device fabrication.
  • The company's financial performance is mixed, with revenue declining in the most recent quarter but improved profitability and strong cash flow generation.
  • The company's profitability is strong, as evidenced by the high return on average assets, return on average total equity, return on average total capital, and return on average invested capital.
  • The company's liquidity position is strong, as evidenced by the high current ratio and quick ratio.
  • The company's financial leverage is relatively low, as evidenced by the low total debt to total equity ratio and debt/EBITDA ratio.
  • The company's asset utilization efficiency is improving, as evidenced by the decreasing inventories and the increasing return on average assets.
  • The company's cash flows are expected to improve in the near term, as the company benefits from its strategic initiatives and the expected rebound in the semiconductor market.
  • The company's strong free cash flow generation will provide it with the capacity to repay debt, increase dividends, and invest in organic growth opportunities.
  • The company's announced strategic initiatives, such as its investments in product development, global R&D infrastructure, and digital transformation, are expected to have a positive impact on future cash flows.
  • The company faces risks from the cyclical and highly competitive nature of the semiconductor capital equipment industry, as well as potential declines in the overall semiconductor market and concentration of sales to a limited number of large customers.
  • The company's reliance on international sales and global operations exposes it to risks related to trade restrictions and tariffs.
  • The company's restructuring plan and business transformation initiatives may not achieve the expected benefits.
  • The company's investments in new etch and deposition capabilities to address the complex semiconductor requirements of the growing AI environment may not be successful.
Analysis
  • Revenue - Revenue is decreasing, which may be due to weakness in the non-volatile memory market. - Revenue growth is decreasing, which may be due to weakness in the non-volatile memory market. - Revenue growth is expected to continue to decrease in the near term, but is expected to rebound in the long term as the industry enters a period of multi-year WFE spending expansion.
    • Profitability
      • The company's profitability is strong, as evidenced by the high return on average assets, return on average total equity, return on average total capital, and return on average invested capital.
      • The company's profitability is significantly higher than the industry average, which suggests that the company is more efficient at generating profits.
      • The company's profitability is decreasing, which may be due to weakness in the non-volatile memory market.
      • Profitability margins are expected to remain relatively stable in the near term, but may improve in the long term as the company benefits from its strategic investments in product development, global R&D infrastructure, and digital transformation.
    • Liquidity
      • The company's liquidity position is strong, as evidenced by the high current ratio and quick ratio.
      • The company's liquidity is slightly lower than the industry average, but is still considered to be strong.
      • The company's short-term liquidity position is strong, as evidenced by the stable operating cash flow trends.
      • The company's strong liquidity position and conservative capital structure will provide it with financial flexibility to pursue growth opportunities and navigate potential economic downturns.
    • Solvency
      • The company's financial leverage is relatively low, as evidenced by the low total debt to total equity ratio and debt/EBITDA ratio.
      • The company's financial leverage is significantly lower than the industry average, which suggests that the company is less risky.
      • The company's long-term solvency is also strong, as evidenced by the stable free cash flow generation and the decreasing debt obligations.
      • The company's strong financial flexibility is evidenced by its stable cash flow generation and its conservative capital structure.
    • Operational Efficiency
      • The company's asset utilization efficiency is improving, as evidenced by the decreasing inventories and the increasing return on average assets.
      • The company's efficiency is significantly higher than the industry average, which suggests that the company is more efficient at using its assets to generate revenue.
      • The company's focus on operational improvements and reengineering business processes to drive efficiencies and implement AI at scale are likely contributing to the decreasing inventories and the increasing return on average assets.
    • Cash Flow Analysis
      • Cash flows from core business operations are decreasing, which may be due to a decline in sales or a decrease in profitability.
      • Cash flows related to the acquisition and disposal of long-term assets are decreasing, which may be due to a reduction in capital expenditures or a decline in investment activity.
      • Cash flows related to borrowing and repaying debt, issuing and repurchasing equity, and paying dividends are decreasing, which may be due to a reduction in borrowing, a decline in share repurchases, or a decrease in dividend payments.
      • The company's cash flows are expected to improve in the near term, as the company benefits from its strategic initiatives and the expected rebound in the semiconductor market.
      • The company's strong free cash flow generation will provide it with the capacity to repay debt, increase dividends, and invest in organic growth opportunities.
      • The company's announced strategic initiatives, such as its investments in product development, global R&D infrastructure, and digital transformation, are expected to have a positive impact on future cash flows.
    • Risk Factors
      • The company faces risks from the cyclical and highly competitive nature of the semiconductor capital equipment industry, as well as potential declines in the overall semiconductor market and concentration of sales to a limited number of large customers.
      • The company's reliance on international sales and global operations exposes it to risks related to trade restrictions and tariffs.
      • The company's restructuring plan and business transformation initiatives may not achieve the expected benefits.
      • The company's investments in new etch and deposition capabilities to address the complex semiconductor requirements of the growing AI environment may not be successful.
    • Future Outlook
      • The company's financial performance is expected to improve in the near term, as the company benefits from its strategic initiatives and the expected rebound in the semiconductor market.
      • The company's strong liquidity position and conservative capital structure will provide it with financial flexibility to pursue growth opportunities and navigate potential economic downturns.
      • The company's strong free cash flow generation will provide it with the capacity to repay debt, increase dividends, and invest in organic growth opportunities.
      • The company's announced strategic initiatives, such as its investments in product development, global R&D infrastructure, and digital transformation, are expected to have a positive impact on future cash flows.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-10-14)
Industrial Select Sector SPDR Fund (XLI)
  • Performance Comparison:
    • LRCX has exhibited a mixed performance history compared to XLI. While it outperformed XLI over longer periods like 2 years and 3 years, it underperformed in shorter periods like YTD, 3 months, and 6 months. This suggests that LRCX's performance is more volatile and less consistent than XLI's.
  • Risk and Return Analysis:
    • LRCX has provided higher annualized returns than XLI over the past three years. However, this comes at the cost of significantly higher volatility. LRCX's annualized volatility has consistently been higher than XLI's, indicating a greater degree of price fluctuations.
    • LRCX's maximum drawdown of 49.32% in Q3 2022 is significantly larger than XLI's maximum drawdown of 21.64% during the same period. This indicates that LRCX is more susceptible to market downturns and may experience larger price declines.
  • Risk-Adjusted Performance:
    • XLI consistently exhibited a higher Sharpe ratio than LRCX over the past three years. This suggests that XLI has provided better risk-adjusted returns, meaning it has generated higher returns for the level of risk taken.
    • LRCX's beta has consistently been above 1, indicating that it is more volatile than the overall market. XLI's beta has consistently been below 1, indicating that it is less volatile than the overall market. This suggests that LRCX is more sensitive to market movements and may experience larger price fluctuations during market swings.
  • Overall Assessment:
    • LRCX has shown potential for higher returns but comes with significantly higher risk. Its higher volatility, larger drawdowns, and lower Sharpe ratio compared to XLI indicate a more volatile and riskier investment.
    • XLI, on the other hand, has provided more consistent returns with lower volatility and a better risk-adjusted performance. Investors seeking a more stable investment with lower risk may prefer XLI.
    • It's important to note that LRCX's recent performance has shown some improvement in its risk profile, with smaller drawdowns and an improving Sharpe ratio. However, its higher beta and overall volatility remain significant concerns.
    • Investors should carefully consider their risk tolerance and investment goals before making any investment decisions.
Peers Price History(as of 2024-10-14)
KLA Corp. (KLAC)Applied Materials, Inc. (AMAT)
  • Performance Comparison: LRCX has consistently underperformed both KLAC and AMAT over all the periods analyzed. This underperformance is particularly pronounced in the longer timeframes (1 year, 2 years, and 3 years). While LRCX has shown some short-term outperformance in periods like the 1-month period, its overall performance trend remains weaker than its peers.
  • Risk and Return Analysis: LRCX has provided lower annualized returns than both KLAC and AMAT over the analyzed periods. However, LRCX has also exhibited lower annualized volatility than AMAT, suggesting that it might be less risky. The drawdown figures further support this, with LRCX experiencing a larger maximum drawdown than its peers, indicating a higher risk profile.
  • Risk-Adjusted Performance: Despite having lower volatility than AMAT, LRCX's Sharpe ratio has generally been lower than AMAT's, suggesting that AMAT has offered a better risk-adjusted return. KLAC has consistently had the highest Sharpe ratio, indicating the best risk-adjusted performance among the three companies.
  • Overall Assessment: LRCX has consistently underperformed its peers, KLAC and AMAT, in terms of both absolute returns and risk-adjusted returns. While LRCX has exhibited lower volatility than AMAT, its larger maximum drawdown suggests a higher risk profile. KLAC has consistently outperformed both LRCX and AMAT in terms of risk-adjusted returns, as evidenced by its higher Sharpe ratio. Investors considering LRCX should carefully weigh its lower returns and higher risk profile against its potential for growth and profitability.
Peers Fundamentals(as of 2024-06-30)
KLA Corp. (KLAC)Applied Materials, Inc. (AMAT)

  1. Market Position and Size:

    • LRCX is a large company in the semiconductor equipment industry, but its market capitalization is significantly smaller than its peers, Applied Materials, Inc. (AMAT) and KLA Corp. (KLAC).
    • Despite its smaller size, LRCX's revenue, EBITDA, and net income are comparable to its peers, indicating a strong financial performance relative to its market cap.

  2. Profitability and Efficiency:

    • LRCX exhibits strong profitability, exceeding both peer and industry averages in Gross Profit Margin, EBITDA Margin, and Net Profit Margin.
    • LRCX demonstrates high operational efficiency, with Return on Average Assets, Return on Average Total Equity, Return on Average Total Capital, and Return On Average Invested Capital significantly higher than industry benchmarks.

  3. Financial Health and Stability:

    • LRCX maintains a strong liquidity position, with Current Ratio and Quick Ratio above the industry average, indicating ample short-term financial flexibility.
    • LRCX's debt position is relatively healthy, with Total Debt to Total Equity Ratio and Debt / EBITDA below the industry average, suggesting a conservative balance sheet structure.

  4. Valuation and Market Perception:

    • LRCX's valuation is relatively high compared to its peers and the industry average, as reflected in its Enterprise Value To Sales, Enterprise Value To EBITDA, Price To Earnings, Price to Book Ratio, and Price To Sales Ratio.
    • The market's positive perception of LRCX's future prospects is evident in its high valuation, despite its lower growth rates compared to peers.

  5. Cash Flow and Capital Management:

    • LRCX's cash flow generation is strong, but it is less than its peers, suggesting that LRCX is investing in its business, which could lead to future growth.
    • LRCX's capital allocation strategy appears to prioritize investment in its business, as evidenced by its lower Free Cash Flow compared to peers.

  6. Growth and Future Prospects:

    • LRCX's growth rates are generally lower than the peer group average, indicating potential challenges in maintaining market share against larger competitors.
    • However, LRCX's Free Cash Flow Margin and Book Value Per Share have been accelerating in recent years, suggesting potential for future growth.

  7. Potential for Investment:

    • LRCX presents a mixed investment proposition. Its strong profitability, efficiency, and financial health are attractive, but its lower growth rates and high valuation raise concerns.
    • Investors seeking a company with strong fundamentals and a conservative balance sheet may find LRCX appealing, but those prioritizing high growth may prefer its peers.

  8. Key Risks and Considerations:

    • LRCX's lower growth rates compared to peers pose a risk to its market share and future profitability.
    • The high valuation of LRCX may make it vulnerable to market corrections or changes in investor sentiment.
    • LRCX's reliance on the semiconductor industry makes it susceptible to cyclical fluctuations in demand.

  9. Overall Assessment:

    • LRCX is a financially sound company with strong profitability and efficiency, but its growth rates are lower than its peers, and its valuation is relatively high.
    • Investors should carefully consider LRCX's growth prospects and valuation before making an investment decision.