Beware of Risk – LRCX Shares on Sale

One of the biggest losers as of today's evening session is farm & heavy construction machinery company Lam Research, whose shares are down -5.1%, underperforming the Nasdaq by -3.0%.
At $623.11, LRCX is 8.01% below its average analyst target price of $677.36.

The average analyst rating for the stock is buy. LRCX underperformed the S&P 500 by -4.0% so far today, but outpaced the index by 37.0% over the last year with a return of 53.0%.

Lam Research's trailing 12 month P/E ratio is 18.8, based on its trailing EPS of $33.22. The company has a forward P/E ratio of 17.4 according to its forward EPS of $35.84 -- which is an estimate of what its earnings will look like in the next quarter. As of the first quarter of 2023, the average Price to Earnings (P/E) ratio of US technology companies is 27.16, and the S&P 500 average is 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

LRCX’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.

When we perform the calculation for Lam Research, we obtain a PEG ratio of 2.86, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.

An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Lam Research's gross profit margin trends:

Date Reported Revenue ($ k) Cost of Revenue ($ k) Gross Margins (%) YoY Growth (%)
2022-08-24 17,227,039 -9,355,232 46 -2.13
2021-08-17 14,626,150 -7,820,844 47 2.17
2020-08-18 10,044,736 -5,436,043 46 2.22
2019-08-20 9,653,559 -5,295,100 45 -4.26
2018-08-14 11,076,998 -5,911,966 47 4.44
2017-08-15 8,013,620 -4,410,261 45
  • Average gross margin: 46.0%
  • Average gross margin growth rate: -0.1%
  • Coefficient of variability (lower numbers indicating more stability): 1.9%

We can see from the above that Lam Research's gross margins are very strong. Potential investors in the stock will want to determine what factors, if any, could derail this attractive growth story.

Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Lam Research's last four annual reports, we are able to obtain the following rundown of its free cash flow:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cash Flow ($ k) YoY Growth (%)
2022-08-24 3,099,674 -546,034 3,645,708 -7.4
2021-08-17 3,588,163 -349,096 3,937,259 69.0
2020-08-18 2,126,451 -203,239 2,329,690 -33.05
2019-08-20 3,176,013 -303,491 3,479,504 18.79
2018-08-14 2,655,747 -273,469 2,929,216 34.04
2017-08-15 2,029,282 -156,128 2,185,410
  • Average free cash flow: $3.08 Billion
  • Average free cash flow growth rate: 0.0%
  • Coefficient of variability (the lower the better): 5317018701.2%

With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in LRCX have received an annualized dividend yield of 1.1% on their capital.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). As of the first quarter of 2023, the mean P/B ratio of the technology sector is 6.23, compared to the S&P 500 average of 2.95. The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Lam Research's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 10, so it's likely that equity investors are over-valuing the company's assets.

As of first quarter of 2023, Lam Research is likely fairly valued because it has a lower P/E ratio than its sector average, an elevated P/B ratio, and irregular cash flows with a flat trend. The stock has strong growth indicators because of its strong margins with a stable trend, and an above average PEG ratio. We hope this analysis will inspire you to do your own research into LRCX's fundamental values -- especially their trends over time.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.