Lam Research (NASDAQ:LRCX) Surprises With Q1 Sales, Provides Encouraging Quarterly Guidance

Petr Huřťák /
2023/10/18 4:11 pm EDT

Semiconductor equipment maker Lam Research (NASDAQ:LCRX) reported Q1 FY2024 results exceeding Wall Street analysts' expectations, with revenue down 31.4% year on year to $3.48 billion. Guidance for next quarter's revenue was also better than expected at $3.7 billion at the midpoint, 1.41% above analysts' estimates. Turning to EPS, Lam Research made a non-GAAP profit of $6.85 per share, down from its profit of $10.42 per share in the same quarter last year.

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Lam Research (LRCX) Q1 FY2024 Highlights:

  • Revenue: $3.48 billion vs analyst estimates of $3.42 billion (1.94% beat)
  • EPS (non-GAAP): $6.85 vs analyst estimates of $6.13 (11.8% beat)
  • Revenue Guidance for Q2 2024 is $3.7 billion at the midpoint, above analyst estimates of $3.65 billion
  • Free Cash Flow of $874.2 million, down 16.3% from the previous quarter
  • Inventory Days Outstanding: 236, down from 252 in the previous quarter
  • Gross Margin (GAAP): 47.5%, up from 46.1% in the same quarter last year

"Lam continues to deliver strong results despite a cyclically soft year for wafer fabrication equipment spending," 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.

Semiconductor Manufacturing

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

Sales Growth

Lam Research's revenue growth over the last three years has been mediocre, averaging 15.6% annually. But as you can see below, its revenue declined from $5.07 billion in the same quarter last year to $3.48 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

Even though Lam Research surpassed analysts' revenue estimates, this was a slow quarter for the company as its revenue dropped 31.4% year on year. This could mean that the current downcycle is deepening.

Lam Research's revenue growth has decelerated over the last three quarters and its management team projects growth to turn negative next quarter. As such, the company is guiding for a 29.9% year-on-year revenue decline while analysts are expecting a 0.19% drop over the next 12 months.

The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. See it here.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity 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 DIO came in at 236, which is 100 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what we've seen in the past.

Key Takeaways from Lam Research's Q1 Results

Sporting a market capitalization of $85.9 billion, more than $5.16 billion in cash on hand, and positive free cash flow over the last 12 months, we believe that Lam Research is attractively positioned to invest in growth.

We were impressed by how significantly Lam Research blew past analysts' EPS expectations this quarter, driven by better-than-expected systems and customer support revenue. We were also glad its inventory levels shrunk. On the other hand, its operating margin declined. Overall, we think this was a strong quarter that should satisfy shareholders. The stock, however, is down 3.5% immediately after reporting and currently trades at $619.98 per share.

So should you invest in Lam Research right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here.

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