Unlike Nvidia, Lam Research does not appear on the evening news. Its products, such as wafer cleaning equipment, etch tools, and deposition systems, don’t take very good pictures, and it doesn’t have a captivating CEO on magazine covers. However, this is the place to start if you want to know how the semiconductor industry really operates. The type of equipment Lam manufactures determines each chip used in an AI server and each high-bandwidth memory module stacked inside a GPU cluster. That’s the background for comprehending what has been going on with LRCX stock, which has experienced a truly challenging few months following a remarkable few years.
It’s worth taking a moment to consider the most recent quarter’s numbers. Lam Research exceeded both top and bottom line projections with fiscal first-quarter revenue of $8.22 billion, up 54.4% year over year. By roughly 0.94%, the EPS exceeded expectations. By any standard measure, these are impressive results. However, on November 3, the stock ended the day at $227.56, down almost 5% and about 48% from its 52-week high of $438.50. The intriguing story resides in that discrepancy between the stock price and the business results.
The stock is being impacted in part by forward-looking factors. The December quarter revenue guidance came in at $8.6 billion, which sounds good until you realize that Wall Street had been expecting more and that the guidance implies sequential growth decelerating from roughly 22% down to roughly 4.5%. Management acknowledged that supply chain constraints are limiting near-term tool delivery speeds. Although those figures aren’t disastrous, momentum investors may interpret even a slight slowdown as a warning sign when a stock is priced for rapid growth. A few made their way to the door.
The other issue that keeps coming up is the exposure to China. China accounts for about 35% of Lam’s total revenue, which is an exceptionally concentrated exposure for a US semiconductor equipment company operating in the current geopolitical environment. Lam would be more severely impacted than most of its competitors by any tightening of export regulations, as the trend has been toward more restrictions rather than fewer. China sales are anticipated to slow down in the upcoming quarters, according to management. Sentiment was not improved by that advice.
The insider selling comes next. CEO Timothy Archer sold more than $7 million in equity in recent months, along with other director share dispositions, according to SEC filings. There have been no documented open-market purchases. Although insider selling isn’t always concerning—executives sell shares for a variety of reasons—some institutional investors interpret it as a warning to lower their own exposure when it’s coupled with a slowing guidance trajectory and a China headwind. With the RSI getting closer to oversold territory and the MACD displaying a sell signal, the technical picture supported that caution.
The dissonance in this situation is difficult to ignore. With some bullish calls as high as $500, analysts maintain an average price target of about $359, which is significantly higher than where the stock is currently trading. The long-term investment case is based on an unchanging fact: there is a genuine, expanding need for wafer fabrication equipment driven by AI, which calls for precisely what Lam manufactures. As GPU architectures require more memory bandwidth per chip, the demand for high-bandwidth memory, which is handled by Lam’s etch and deposition tools, is growing. These are long-lasting trends rather than passing fads.
The amount of that thesis that the market has already priced in is indicated by the five-year return of 312%. It seems like value to pay $227 for a stock that was trading at $438 eight months ago, but only if the growth runway is as long as the optimists think. The stock is technically oversold, but that doesn’t mean it’s cheap. Its 50-day moving average is close to $292, and its 200-day moving average is close to $283, both of which are significantly above the current price.
Observing this situation gives the impression that Lam Research is simultaneously caught between two realities: the company is genuinely strong and the stock got genuinely ahead of itself. The question that investors are currently paying for is resolved by those two facts.
