Lam Research (NASDAQ:LRCX) is a U.S. semiconductor equipment provider that plays a critical role in advancing semiconductor technology, supplying major fabrication plants worldwide. However, due to current Sino-American geopolitical tensions and the stocks apparent overvaluation, there appears to be little reason to invest in the company at this time, given the high risks of medium-term volatility.
Operational profile and macroeconomic analysis
Lam Research provides wafer fabrication equipment and services to the semiconductor industry. Its products are essential for manufacturing integrated circuits, which are used in almost all modern electronic devices. The company specializes in front-end wafer processing, which is essential for creating transistors, capacitors, and their wiring. Lam also offers back-end wafer-level packaging, microelectromechanical systems, and other solutions.
As demand for advanced semiconductors grows across industries like AI, 5G, and autonomous vehicles, Lams equipment is set to play an essential role. Management has strategically invested in emerging technologies, including backside power delivery and 3D DRAM, positioning the company well to capitalize on future trends in semiconductor design. Key customers include Taiwan Semiconductor Manufacturing Company (NYSE:TSM), Intel (NASDAQ:INTC), and Samsung (SSNGY), with Applied Materials (NASDAQ:AMAT) and Tokyo Electron as key direct competitors.
Applied Materials has a more advanced vertical integration strategy than Lam Research, enabling it to offer more comprehensive solutions. Both companies serve the same major fabs. In contrast, Tokyo Electron has a particularly strong presence in Asia and maintains a close partnership with ASML. As Tokyo Electron is not U.S.-based, it currently faces no policy constraints on serving the Chinese market, allowing it to continue operations in China without interruption.
Notably, U.S. restrictions on selling advanced semiconductor equipment to China have limited Lams access to a key market, as China is a major buyer of these products. The restrictions come at a time of heightened tensions around Taiwan. U.S. military officials, such as Admiral John Aquilino, former head of the U.S. Indo-Pacific Command, have testified that China aims to develop the capability to invade Taiwan by 2027, adding a certain level of risk to semiconductor investments at this time.
However, I believe a Trump administration could help mitigate the risk of China taking such actions. Xi Jinping has congratulated Trump on his election victory, emphasizing the importance of stable, healthy, and sustainable ties between China and the United States. In a message to Trump, Xi highlighted that cooperation would benefit both sides, while confrontation would be detrimental. In light of this, I feel we are positioned to navigate strong Sino-American relations for global peace and order. As a macro investor, I remain bullish on the investment theses for TSMC, Lam Research, and ASML (NASDAQ:ASML) at this time.
Financial and valuation analysis
Lam Researchs financial performance is cyclical, but currently, demand visibility extends to mid-2027. I will, therefore, use this as the terminal point of my medium-term discounted earnings model. The consensus estimate for Lams June 2027 EPS without NRI is $4.85, indicating an average year-over-year growth rate of 18.97% from the June 2024 EPS without NRI of $2.88. I find this slightly underestimated, especially given current trends in AI and cloud computing, which I expect to strengthen in the medium term. Growth in these new technologies is likely to provide broader tailwinds for the semiconductor industry and support sales of manufacturing equipment like Lams. Given Lams 10-year EPS growth rate (without NRI) of 27.5%, I am more optimistic than the consensus, estimating a 20% CAGR from June 2024s normalized EPS of $2.88, reaching $4.98 by June 2027.
Due to the cyclical nature of Lams earnings, its PE ratio tends to contract as earnings increase, though this typically stabilizes toward equilibrium by the end of an up-cycle. At the end of Fiscal 2027, we should still be seeing revenue growth, so I believe its reasonable to use the companys 10-year median PE ratio without NRI as a terminal multiple. Currently, its PE ratio without NRI stands at 24.7, but its 10-year median is 16.4. Therefore, I estimate a June 2027 stock price of $81.67. Given the current stock price of $79.21, this suggests the stock is significantly overvalued.
Additionally, discounting my June 2027 stock price back over 2.56 years at the companys weighted average cost of capital (WACC) of 14.97% provides an intrinsic value of $57.14. This WACC is calculated by combining the cost of equity at 15.55%, weighted at 95.34% of total capital, and the cost of debt at 3.71%, weighted at 4.66% and adjusted for a tax rate of 12.36%. Based on these estimates, the intrinsic value indicates a margin of safety of -27.86% relative to the current price of $79.21.
Risks and contrarian analysis
In my macroeconomic analysis, I discussed geopolitical risk, expressing optimism given Trumps current leadership. However, his presidency will last only four years, leaving uncertainty about the subsequent administration. Despite this optimism, I maintain a risk-neutral stance in my portfolio modeling, with a 50% allocation to bonds, gold, and bitcoin as a prudent measure. Given Lams overvaluation and the potential for volatilityeven in the absence of additional geopolitical disruptionsan allocation to Lam Research appears unwise based on my analysis.
In response to U.S. restrictions on sales of advanced semiconductor equipment to China, Lam has accelerated efforts to adapt, yet faces rising domestic competition. Moreover, companies like Advanced Micro-Fabrication Equipment (SHSE:688012), Naura Technology Group (SZSE:002371), China Electronics Technology Group Corporation, Shanghai Micro Electronics Equipment, and Kingsemi (SHSE:688037) are all benefiting from a favorable Chinese policy environment aimed at reducing reliance on U.S. technology. Thus, even if Sino-American relations improve, Lam is likely to face limited market opportunities in China due to these emerging competitors.
On the other hand, there is the possibility of the stock maintaining an elevated valuation over the next couple of years compared to what I have estimated. This would largely be the result of momentum and sentiment factors, though, and investing in Lam based on this premise is largely speculative. It is much more prudent to find semiconductor stocks that indicate both an undervaluation and future momentum potential. For example, ASML has declined by 22.75% in the past three months in price based on a lower 2025 growth outlook detailed by management in its latest earnings report, but the consensus is that the company will still generate a 25.89% normalized EPS year-over-year growth in Fiscal 2025 compared to a year-over-year decline of 5.15% in Fiscal 2024.
Conclusion
Lam Research is undoubtedly a high-quality company, but it is currently overvalued. When factoring in geopolitical risks and strained market conditions in China, an investment in Lam seems unlikely to deliver alpha in the short or medium term. Based on my valuation model, the stock is unlikely to appreciate significantly by June 2027, and its current price reflects a margin of safety of -27.86%. Consequently, my rating for Lam Research is a hold.