Updated: Aug 4, 2020
Price on date of analysis: $308.44
Market cap: $49.23B
Overall assessment: HOLD
A quick snapshot: Overall, I would give the company a Hold at the current price. The PE/PEG scores are just in line with expectations. The predicted growth is just 17% for the next 3 years, which does not leave much room for any risks: anything goes wrong and this will be significantly reduced. The company PE is almost near it’s the highest level it ever saw. Also, the stock price appreciated too much in the past year growing from $125 to $380 which is a 200% increase. It is likely the time for a bit of a pullback.
Why did it pique my interest?
LRCX stock price grew from $80 to $300 in the past 4 years.
While I am not a fan of technical analysis, it seems to be doing Elliot Waves. Currently (possibly) in the second long move. Should retract a bit now and go for the 3rd.
I saw a lot of discussions about the stock for the past 3 years but never had a chance to investigate it.
Buy ratings from analysts.
Overview: company, category description
Lam Research Corp. engages in manufacturing and servicing of wafer processing semiconductor manufacturing equipment. It operates through the following geographical segments: the United States, China, Europe, Japan, Korea, Southeast Asia, and Taiwan. It offers thin film deposition, plasma etch, photoresist strip, and wafer cleaning. The company was founded by David Lam on January 21, 1980, and is headquartered in Fremont, CA.
The stock price had stellar growth in the past 4 years growing from $80 to $298. It peaked in 2018, then retraced a bit and, in the past year, grew from $120 to $298. Great results.
While I am not that experienced in reading Elliot Waves, I do think Fibo has a point. Looking at the graph below it just naturally tells you it is time for a 36-50% retraction of the recent run (to $200-230 area). But, hey, the stock market is unpredictable.
The company pays dividends of $1.1 to $1.15 per quarter, which amounts to about 1.5% return per year.
Please note for the rest of the analysis that the company reports both GAAP (financial statements reporting accepted in the USA) and non-GAAP financial statements that they use for reporting in Asia. With that, there is mixed information on the Internet with most websites and analysts using the non-GAAP income (not sure why they would even do this), others using GAAP statements. This causes a discrepancy in reported EPS and EPS forecasts. Non-GAAP EPS is lower than the GAAP EPS. In the end, we are interested in EPS growth, so it does not really matter. In this article, I had to use both but will highlight where is which.
Company sales and EPS were growing very well from fiscal 2016 to mid-fiscal 2018 (Lam Research fiscal year is July to June). In mid-fiscal 2018, revenue and profit took a dip, and after that, slowly decreased each quarter. However, in the most recent quarter sales and EPS resumed to growth (both up year-on-year).
The same trend can be seen looking at yearly financials: strong growth from 2015 to 2018 with sales doubling, profits growing 260%.
Deep diving into 2018, sales were declining for pretty much all 2019, but in December 31st reporting period, the company reported an almost 20% increase in sales.
Finally, coming back to revenue levels slightly above Q2 2018 (ending Dec 31, 2018) despite declines in revenue for the past few quarters. The Profit and EPS are not yet fully matching year-ago levels despite the number of outstanding stock decrease. Lower profit for this quarter is caused by cumulative income tax benefit reversal due to a court ruling totaling $74.5M. It seems this is a one-time increase in taxes. Company EPS grew 10.96% growth vs. the previous quarter.
The company delivered an EPS of 4.01 (non-GAAP). Analyst predictions for December 2019 quarter were $3.85 (non-GAAP) – a YOY decline.
Lam Research Corp. LRXC, shares rallied in the extended session Wednesday after the chip-equipment maker's quarterly results and outlook topped Wall Street results.
Lam shares surged 5% after hours, following a 1.2% decline in the regular session to close at $298.22.
The company reported fiscal second-quarter net income of $514.5 million, or $3.43 a share (GAAP), compared with $568.9 million, or $3.51 a share, in the year-ago period.
Adjusted earnings were $4.01 a share (non-GAAP). Revenue rose to $2.58 billion from $2.52 billion in the year-ago quarter.
Analysts surveyed by FactSet had forecast earnings of $3.85 (non-GAAP) a share on revenue of $2.51 billion. Lam expects fiscal third-quarter earnings of $4.15 to $4.95 a share on revenue of $2.6 billion to $3 billion, while analysts had forecast $3.98 a share on revenue of $2.58 billion.
So, the company seems to be returning to growth, beating estimates. The company also provided positive guidance that is above analysts’ predictions. Below is the quote from the investors' presentation.
I'd like to provide our non-GAAP guidance for the march 2020 quarter. We're expecting revenue of $2.800 billion plus or minus $200 million. Gross margin of 46.5% plus or minus one percentage point; operating margins of 28% plus or minus one percentage point and finally earnings per share of $4.55 plus or minus $0.4 based on a share count of approximately 149 million shares.
In addition, the company is doing fine with capital structure and debt. No issues here.
Key financial ratings/Stock Value
Lam Research (NASDAQ:LRCX) +4% reports Q2 beats with upside Q3 guidance that sees $2.6-3B (mid-point $2.8B) in revenue and $4.15-4.95 EPS (mid-point $4.55)
Q2 adjusted gross margin was 45.7% compared to the 45.1% consensus. The operating margin was 27.1%.
Below are the analysts' estimates for LRCX earnings growth (non-GAAP).
Estimates say the company will grow on average 17% per year. This looks about right. Obviously, hoping the company will beat these estimates, but we will use the below value the stock.
June 29, 2019 – 14.372
June 29, 2020 – 15.806 (+10%)
June 29, 2021 – 19.803 (+25%)
June 29, 2022 – 23.124 (+17%)
Using the current price of $308 PE for this year is 21.4. Future PE for 2020 is 19.45, for 2021: 15.55
Calculating PEG (price-to-earnings-to-growth). For this year, it is 21.4/17 = 1.26. For 2020 1.14. It seems about right for the company and its growth. It seems the company is valued well for this year. For next year, the price may increase a bit. Usually, PEG of 1 to 1.2 considered good. PEG below 1 means the stock is under-priced.
PE ratio (21.9x) is below the Semiconductor industry average (30.8x). However, historically, PE of the company never went above 24 (see below).
Ratings by analysts
Zacks’ thinks the company has a rank of 2 -Buy with strong value, growth, and momentum.
The target price for the stock is $340 with 14 analysts saying it is a Strong Buy, 7 – Hold, and 1 – Strong Sell.
The collection of analyst predictions on Nasdaq.com also aligns with the above: the target price is $344 and a recommendation of a Buy.
Who owns it? Changes in ownership
90% of the stock float is owned by Institutions. They seem to be selling the stock to each other as the number of increased and decreased positions is generally on par.
With the recent earnings report, the stock saw a spike in conversations. Usually, the level of conversations is strong with 100 tweets per day. The sentiment is largely bullish.
While the company is gaining market share against Applied Materials, it is facing strong competition from Japanese competitors.
Memory chip spending will be lackluster in 2020, further minimizing any tailwinds Lam may be anticipating.
Significant headwinds remain at the macro level with the China trade/technology embargo, which is negatively impacting global economies.
Shipment problems may reduce sales with travel/shipment ban due to coronavirus.
Overall assessment and summary
Overall, I would give the company a Hold at the current price. The PE/PEG scores are just in line with expectations. The predicted growth is just 17% for the next 3 years, which does not leave much room for any risks: anything goes wrong and this will be significantly reduced. The company PE is almost near it’s the highest level it ever saw. Also, the stock price appreciated too much in the past year growing from $125 to $380 which is a 200% increase. It is likely the time for a bit of a pullback.
My rating: HOLD
Have an idea about Lam Research (LRCX)? You have a different opinion about this stock? I made an error in assumptions? You have additional information to share? Please leave your comments below.