Lam Research (NASDAQ:LRCX) Q2: Beats On Revenue But Quarterly Guidance Underwhelms

Jabin Bastian /
2023/01/25 4:10 pm EST

Semiconductor equipment maker Lam Research (NASDAQ:LCRX) reported Q2 FY2023 results beating Wall St's expectations, with revenue up 24.8% year on year to $5.27 billion. However, guidance for the next quarter was less impressive, coming in at $3.8 billion at the midpoint, being 11.7% below analyst estimates. Lam Research made a GAAP profit of $1.46 billion, improving on its profit of $1.19 billion, in the same quarter last year.

Is now the time to buy Lam Research? Access our full analysis of the earnings results here, it's free.

Lam Research (LRCX) Q2 FY2023 Highlights:

  • Revenue: $5.27 billion vs analyst estimates of $5.08 billion (3.81% beat)
  • EPS (non-GAAP): $10.71 vs analyst estimates of $10 (7.11% beat)
  • Revenue guidance for Q3 2023 is $3.8 billion at the midpoint, below analyst estimates of $4.3 billion
  • Free cash flow of $976.8 million, roughly flat from previous quarter
  • Inventory Days Outstanding: 151, up from 145 previous quarter
  • Gross Margin (GAAP): 45%, down from 46.7% same quarter last year

"Lam closed out 2022 with record revenue and earnings per share for both the December quarter and calendar year, despite supply chain challenges and inflationary pressures," said Tim Archer, Lam Research's President and Chief Executive Officer.

Founded in 1980 by David Lam, who pioneered semiconductor etching technology, Lam Research (NASDAQ:LCRX) is one of the leading providers of the wafer fabrication equipment used to make semiconductors.

The semiconductor industry is driven by demand for advanced electronic products like smartphones, PCs, servers and data storage. The growth of data and technologies like artificial intelligence, 5G networks and smart cars are also creating a next wave of growth for the industry. To keep up with ever changing customer needs requires new tools that can design, fabricate and test at ever smaller sizes and more complex architectures, and that is driving the demand for semiconductor capital manufacturing equipment.

Sales Growth

Lam Research's revenue growth over the last three years has been strong, averaging 26.7% annually. But as you can see below, last year has not been especially strong, with quarterly revenue growing from $4.22 billion to $5.27 billion. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Lam Research Total Revenue

This was a decent quarter for Lam Research as revenues grew 24.8%, topping analyst estimates by 3.81%. This marks 13 straight quarters of revenue growth, which means the current upcycle has had a good run, as a typical upcycle tends to be 8-10 quarters.

Lam Research's revenue growth was positive this quarter, but the company is guiding to decline of 6.41% YoY next quarter, while analysts expect to see declines of 17.3% over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.

Lam Research Inventory Days Outstanding

This quarter, Lam Research’s inventory days came in at 151, 32 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.

Key Takeaways from Lam Research's Q2 Results

With a market capitalization of $66.4 billion, more than $4.58 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We were impressed by how strongly Lam Research outperformed analysts’ earnings expectations this quarter. And we were also excited to see that it outperformed Wall St’s revenue expectations. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and the inventory levels increased a little. Overall, it seems to us that this was a complicated quarter for Lam Research. The company is down 3.17% on the results and currently trades at $472.88 per share.

Should you invest in Lam Research right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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The author has no position in any of the stocks mentioned.