Lam Research Corporation (LRCX), which supplies equipment and services to semiconductor companies, has been capitalizing on the rising demand for semiconductors worldwide. The company was founded in 1980 and is based in Fremont, California.

With semiconductor manufacturing units working at full capacity to meet the surging market demand, LRCX’s products and services have been highly demanded over the past year. LRCX stock has gained 142.2% over the past year, and 19.5% year-to-date.

Click here to checkout our Semiconductor Industry Report for 2021

Here’s what we think could shape LRCX’s performance in the near term:

Short-term Industry Tailwinds

A  global semiconductor shortage has raised the prices of semiconductors markedly as the demand for them increases amid unprecedented and rising demand from the electronics sector and with the increasing electrification of the automotive industry. In addition,  LRCX is poised to benefit from U.S. protectionist policies, particularly against China, which is one of the largest producers of semiconductors globally.

In-part because President Biden has left most of his predecessor’s import tariffs on China in place, the domestic semiconductor industry is recuperating gradually. The U.S.’ 2021 defense bill, which was passed in January, contains provisions regarding federal subsidies and incentives for the U.S. semiconductor companies also.

With the White House now commencing a  formal investigation into the global semiconductor shortage, and the Semiconductor Industry Association (SIA) requesting that the federal government provide additional subsidies to the industry, LRCX’s short-term prospects look bright. And with more semiconductor manufacturing companies expanding their businesses to capitalize on the high prices, demand for LRCX’s ancillary products and services is on the rise.

Mixed Financials

LRCX has generated revenues of $11.93 billion over the past year, translating to net income and EPS of $2.96 billion and $20.14, respectively. The company  has a stable liquidity position, with net operating cash flow of $2.34 billion and a covered ratio of 17.50.

LRCX’s trailing-12-month gross profit margin of 46.59% is 3.8% lower than the industry average 48.44%. Its trailing-12-month levered free cash flow margin and capex /sales of 12.33% and 2.15%, respectively, are slightly lower than the industry averages. However, its ROE of 59.9% is significantly higher than the industry average  6.22%.

Trading at a Premium

In terms of forward ev/ebitda, LRCX is currently trading at 17.37x, which is 7.5% higher than the industry average 16.17x. The company’s forward price/sales and price/book multiples of 5.62 and 12.57, respectively, are significantly higher than the  industry averages. Also, its forward price/cash flow ratio of 23.79 is 11.2% higher than the industry average  21.39.

Consensus Ratings and Price Target Reflects Marginal Downside

LRCX has a broker rating of 1.54, indicating favorable analyst sentiment. Of the 26 Wall Street analysts that rated the stock, 20 rated it Buy while six rated it Hold.

However, analysts expect LRCX’s price to decline slightly in the near term to hit $585.43.

POWR Ratings Reflect Uncertain Prospects

LRCX has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

LRCX has a grade of B for Quality, and C for Value and Sentiment. The company’s favorable profitability ratios justify its Quality grade, while the stock’s slight overvaluation and varied analyst sentiment are in sync with the Value and Sentiment grades.

LRCX is ranked #55 of 98 stocks in the B-rated Semiconductor & Wireless Chip industry. One  can check out additional grades for Growth, Momentum, and Stability here.

There are 43 stocks in the Semiconductor & Wireless Chip industry with an overall rating of A or B. Click here to view them.

Bottom Line

While LRCX is currently benefiting from prevailing market conditions, the company’s financials and profitability metrics are weaker than the industry average. With a beta of 1.33, the stock is highly susceptible to market fluctuations. Thus, we think investors should wait until shares of LRCX stabilize slightly and the company’s profit margins improve before investing in the stock.

Click here to checkout our Semiconductor Industry Report for 2021

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LRCX shares were trading at $563.86 per share on Monday morning, down $20.37 (-3.49%). Year-to-date, LRCX has gained 19.68%, versus a 5.58% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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