Lam Research: Stock Split Is A Sign Of Confidence, But I’m Not Buying It (NASDAQ:LRCX) (2024)

Introduction

It’s been a year since I first covered Lam Research (NASDAQ:LRCX). In that article, I argued that many analysts saw a rebound in the second half of 2023 and into 2024, but the company was trading a little too expensive for me. Now, analysts added an extra year since those estimates didn’t pan out the way they said, with steep revenue declines throughout 2023, but we're seeing a bottom now. I wanted to take a look at how the company performed and whether my assumptions changed. It seems that the company’s share price has priced in the recovery in the sector, so the risk/reward is once more not appealing to me. A recent stock split announcement provides us with a look at how the management feels about future growth, and the cheaper shares should bring in more investors, which may keep the company shares elevated for much longer.

Briefly on Performance

Looking at the revenues throughout 2023, we can see steep declines every quarter, with a slowdown in declines in the latest quarter. It’s not a secret that the semiconductor industry had a tough time last year, and that's evident in reduced spending, which affected LRCX significantly. However, it looks like the cutbacks on spending are coming to an end, and as many other semiconductor companies say, in the back half of 2024 and throughout 2025, demand is going to pick up and accelerate.

Looking at the margins, we can see a slightly mixed picture. Gross margins are slightly up from a year ago, while EBIT margins are considerably lower, and net margins are on their way back up but are still lower than a year ago. In my opinion, management did a commendable job of retaining margins somewhat similar during such a downturn in the sector.

Continuing with efficiency and profitability, the company’s ROA and ROE exhibit a similar pattern due to the bottom line improving since The end of 2023. Even at the bottom, these are very impressive returns, which tells me that the management is adept at using the company’s assets and shareholder capital, thus creating value.

In terms of competition, LRCX’s return on total capital, or ROTC, is up there with Applied Materials (AMAT). However, AMAT seems to have a bit more pricing advantage, as it is getting slightly more for the total capital it uses. Nevertheless, LRCX’s 19.22% is well above my minimum of 10%, which in my book means I would be willing to pay a little premium to own the share. By that I mean, I will be assigning a lower margin of safety in my calculations in the later section.

In terms of the company’s financial position, as of Q3 ’24, which was filed on April 29, the company had around $5.7B in cash and equivalents against 4.5B in long-term debt. It’s a decent position, in my opinion. The company is getting more in interest income than it pays out in interest expense, so it's safe to say the company is at no risk of insolvency and could utilize leverage even more to further its growth if it wanted to.

Overall, it seems the company did a decent job throughout 2023 given the negative sentiment and the downturn in demand, which saw the company’s revenues dip almost 30% in Q2, and 31% in Q1, while retaining profitability and other metrics relatively stable.

Comments on the Outlook

The last quarter saw revenues decline by only around 2%, which is much better than previous quarters. This means that demand is picking back up as inventory levels normalize. This seems to echo many other companies in the semiconductor sector that expect demand for products to pick up in the second half of 2024 and accelerate in 2025. It seems that the sector hit bottom last quarter, and I expect healthy growth going forward, especially in DRAM and NAND, which will drive WFE growth going forward due to the everlasting hype of AI-enabled products. SSDs will continue to take market share from HDDs, and if the company manages to capture a lot of that shift to SSDs, LRCX should see decent top-line growth, on top of the recovery in general. DRAM and NAND markets have been heavily affected by the lack of demand in 2023, however, it seems that researchers at Gartner are projecting a robust rebound in these markets in 2024, with the NAND market surging around 50%, while DRAM to see an impressive 88% rebound, coupled with the demand for AI, we can expect a decent growth through the remainder of 2024 and beyond.

Recent Developments

As of writing this update, the company announced a 10-for-1 stock split and a $10B share buyback, which will “return 75% to 100% of free cash flow to stockholders in the form of dividends and share buybacks." This news has been positively met, which sent the shares up around 2.5% as of the time of writing.

I like that the company is focusing on creating value for shareholders. I’m just not sure it's a good use of that capital, especially when the share price is basically at all-time highs. The shares have been on a tear since October 2022, which tells me that the recovery is priced in, and any misses in the upcoming quarters might turn into profit-taking.

In terms of the stock split, this should attract many more investors to a company that has been performing very well and is poised to see further growth. The stock split will create more liquidity since shares will be 10 times cheaper than right now, and this will take effect in October of this year. This to me also signals that the company is confident in its operations and future growth potential, which in turn will boost investor confidence. Other than these factors, there isn’t any value created from the stock split, but the improved affordability should attract more investors as the share price becomes more psychologically appealing at $96 instead of $960.

Valuation

It’s been a year since I’ve done a valuation analysis of LRCX. A lot has changed in terms of macro and micro. I think for revenues and margins I went with less conservative estimates because the company’s financial metrics above have been very impressive, even in a downturn. So, let’s see how the company looks over the next decade.

For revenues, over the last 10 years, the company saw a 39.5% CAGR, which is very impressive, however, the more recent CAGRs of five years and three years have come down significantly, so I cannot assign such a high CAGR that it saw in the last decade, therefore, I'm going with around 14% CAGR over the next decade. Additionally, I modeled a more optimistic case and a more conservative case. Below are those estimates.

For margins, the company sees quite a hit in FY24, which is understandable, however, over time, as the sector returns to growth, the company’s efficiency and profitability will return also, therefore, by FY33, the company’s margins will see a decent improvement. Below are those estimates, which end up being just slightly higher than FY23’s metrics.

For the DCF analysis, I went with the company’s WACC of 10.4% and a 2.5% terminal growth rate because I would like the company to at least match the US long-term inflation goal. Below are my calculations for WACC.

As I mentioned earlier, the company’s financials are great even in a downturn. Therefore, I lowered my discount to the final intrinsic value to 15% instead of 25% as I had previously. With that said, the company’s intrinsic value is around $775 a share, which means LRCX is currently trading at a premium.

Closing Comments

So, my rating is not changing right now. The company still seems to be trading well above what I would be willing to pay for it. It's close to all-time highs, and to me, it seems that the company’s recovery in the second half of the year and beyond has been priced in. It's priced to perfection right now, so any misses on numbers and guidance may wreak havoc on the company’s share price, and I wouldn’t be surprised to see some profit taking.

I have set a price alert closer to the above PT, and I will continue to monitor the semiconductor outlook and the company itself.

I don’t think it’s a good time to add to a current position at these levels, as the risk/reward is not very appealing. It may continue to skyrocket in the near future, but that is the risk I'm willing to forego.

Gytis Zizys