Lam Research (LRCX)

Semiconductor equipment maker Lam Research (NASDAQ:LRCX) beat Wall Street’s revenue expectations in Q3 CY2025, with sales up 27.7% year on year to $5.32 billion. On top of that, next quarter’s revenue guidance ($5.2 billion at the midpoint) was surprisingly good and 8% above what analysts were expecting. Its non-GAAP profit of $1.26 per share was 3.3% above analysts’ consensus estimates.

Company Overview

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

Its primary peers and competitors are Applied Materials, (NASDAQ:AMAT), ASML (NASDAQ:ASML), KLA Corp (NASDAQ:KLAC), and Samsung Electronics (KOSE:005930).

The semiconductor capital (manufacturing) equipment group has become highly concentrated over the past decade. Suppliers have consolidated, and the increasing cost of innovation have made it unaffordable to almost everybody, except the largest companies, to produce leading edge chips. The result of the increased industry concentration has been higher operating margins and free cash generation through the cycle. Despite this structural improvement, the businesses can still be quite volatile, as demand fluctuations for the semiconductor equipment are magnified by the already cyclical nature of underlying semiconductor demand. Read More. Chip manufacturing is done in "batches" on a single round silicon disk, known as a "wafer". Multiple chips can be fabricated on a single wafer, which itself can cost over $10,000 today for the more advanced nodes. The actual chip fabrication process requires hundreds to thousands of steps that are executed at an atomic scale. From start to finish, including fabrication, testing and packaging, it can take 3 months to make a chip. The process to create a silicon wafer starts with sand, which is melted to extract silicon, then purified and formed into a cylinder, which is then sliced down into discs about 1mm thick that are then polished into wafers. Next, the wafers go to a semiconductor foundry and go through a process where successive layers of insulating, conducting, and semiconducting materials are stacked on top of one another to form many small complex interconnected 3D structures (wires, insulators, etc), with each layer consisting of 15-20 processes such as deposition, lithography, etching, stripping, testing, and cleaning.

A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Luckily, Lam Research’s sales grew at an impressive 12.1% compounded annual growth rate over the last five years. Its growth surpassed the average semiconductor company and shows its offerings resonate with customers, a great starting point for our analysis. 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).

We at StockStory place the most emphasis on long-term growth, but within semiconductors, a half-decade historical view may miss new demand cycles or industry trends like AI. Lam Research’s annualized revenue growth of 11.2% over the last two years aligns with its five-year trend, suggesting its demand was predictably strong.

This quarter, Lam Research reported robust year-on-year revenue growth of 27.7%, and its $5.32 billion of revenue topped Wall Street estimates by 1.6%. Beyond the beat, this marks 6 straight quarters of growth, showing that the current upcycle has had a good run - a typical upcycle usually lasts 8-10 quarters. Company management is currently guiding for a 18.8% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 4.9% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and indicates its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.

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.

This quarter, Lam Research’s DIO came in at 141, which is 21 days below its five-year average. At the moment, these numbers show no indication of an excessive inventory buildup.

In the semiconductor industry, a company’s gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

Lam Research’s unit economics are roughly in line with other semiconductor businesses, pointing to a lack of significant pricing pressure and the effectiveness of its products. As you can see below, it averaged a decent 48.6% gross margin over the last two years. That means for every $100 in revenue, roughly $48.60 was left to spend on selling, marketing, R&D, and general administrative overhead.

Lam Research produced a 50.4% gross profit margin in Q3, marking a 2.4 percentage point increase from 48% in the same quarter last year. Lam Research’s full-year margin has also been trending up over the past 12 months, increasing by 1.6 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Lam Research has been a well-oiled machine over the last two years. It demonstrated elite profitability for a semiconductor business, boasting an average operating margin of 31.2%.

Analyzing the trend in its profitability, Lam Research’s operating margin rose by 1.9 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Lam Research generated an operating margin profit margin of 34.4%, up 4 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Lam Research’s EPS grew at a solid 19.7% compounded annual growth rate over the last five years, higher than its 12.1% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Lam Research’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, Lam Research’s operating margin expanded by 1.9 percentage points over the last five years. On top of that, its share count shrank by 13.8%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

In Q3, Lam Research reported adjusted EPS of $1.26, up from $0.86 in the same quarter last year. This print beat analysts’ estimates by 3.3%. Over the next 12 months, Wall Street expects Lam Research’s full-year EPS of $4.54 to stay about the same.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Lam Research has shown terrific cash profitability, and if sustainable, puts it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the semiconductor sector, averaging 29.5% over the last two years.

Taking a step back, we can see that Lam Research’s margin expanded by 9.4 percentage points over the last five years. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability.

Lam Research’s free cash flow clocked in at $1.59 billion in Q3, equivalent to a 29.9% margin. The company’s cash profitability regressed as it was 5 percentage points lower than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends trump fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Lam Research’s five-year average ROIC was 65.6%, placing it among the best semiconductor companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Lam Research is a profitable, well-capitalized company with $6.69 billion of cash and $4.48 billion of debt on its balance sheet. This $2.21 billion net cash position gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

Revenue and EPS both beat in the quarter. We were also impressed by Lam Research’s optimistic revenue guidance for next quarter, which blew past analysts’ expectations. We were also glad its inventory levels shrunk. Zooming out, we think this was a good print with some key areas of upside. The stock traded up 2.7% to $145.21 immediately after reporting.

Updated: December 4, 2025 at 9:26 PM EST

When considering an investment in Lam Research, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

There is a lot to like about Lam Research. First of all, the company’s revenue growth was solid over the last five years. And while its projected EPS for the next year is lacking, its rising cash profitability gives it more optionality. On top of that, Lam Research’s stellar ROIC suggests it has been a well-run company historically.

Lam Research’s P/E ratio based on the next 12 months is 32.5x. Looking across the spectrum of semiconductor companies today, Lam Research’s fundamentals shine bright. We like the stock at this price.

Wall Street analysts have a consensus one-year price target of $160.30 on the company (compared to the current share price of $157.18).