Lam Research (LRCX)

Semiconductor equipment maker Lam Research (NASDAQ:LRCX) beat Wall Street’s revenue expectations in Q1 CY2025, with sales up 24.4% year on year to $4.72 billion. On top of that, next quarter’s revenue guidance ($5 billion at the midpoint) was surprisingly good and 9.7% above what analysts were expecting. Its non-GAAP profit of $1.04 per share was 4.1% 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.

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Lam Research grew its sales at a solid 12.3% compounded annual growth rate. Its growth beat the average semiconductor company and shows its offerings resonate with customers, a helpful 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.

Long-term growth is the most important, but short-term results matter for semiconductors because the rapid pace of technological innovation (Moore's Law) could make yesterday's hit product obsolete today. Lam Research’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 4.7% over the last two years.

This quarter, Lam Research reported robust year-on-year revenue growth of 24.4%, and its $4.72 billion of revenue topped Wall Street estimates by 1.7%. Beyond the beat, this marks 4 straight quarters of growth, implying that Lam Research is in the middle of its cycle - a typical upcycle generally lasts 8-10 quarters. Company management is currently guiding for a 29.1% 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. Although this projection indicates its newer products and services will catalyze better top-line performance, it is still below the sector average. 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 169, which is 9 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.

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 47.7% gross margin over the last two years. That means for every $100 in revenue, roughly $47.66 was left to spend on selling, marketing, R&D, and general administrative overhead.

Lam Research produced a 49% gross profit margin in Q1, up 1.2 percentage points year on year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

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 29.6%.

Analyzing the trend in its profitability, Lam Research’s operating margin rose by 1.3 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q1, Lam Research generated an operating profit margin of 33.1%, up 5.2 percentage points year on year. The increase was solid, 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.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Lam Research’s EPS grew at a solid 19.6% compounded annual growth rate over the last five years, higher than its 12.3% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into Lam Research’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, Lam Research’s operating margin expanded by 1.3 percentage points over the last five years. On top of that, its share count shrank by 13.1%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

In Q1, Lam Research reported EPS at $1.04, up from $0.78 in the same quarter last year. This print beat analysts’ estimates by 4.1%. Over the next 12 months, Wall Street expects Lam Research’s full-year EPS of $3.62 to grow 4.3%.

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 robust cash profitability, and if it can maintain this level of cash generation, will be in a fine position to ride out cyclical downturns while investing in plenty of new products and returning capital to investors. The company’s free cash flow margin averaged 26.6% over the last two years, quite impressive for a semiconductor business.

Taking a step back, we can see that Lam Research’s margin expanded by 2 percentage points over the last five years. This is encouraging because it gives the company more optionality.

Lam Research’s free cash flow clocked in at $1.02 billion in Q1, equivalent to a 21.6% margin. The company’s cash profitability regressed as it was 12.2 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 are more important.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Lam Research’s five-year average ROIC was 64.2%, 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.

Companies with more cash than debt have lower bankruptcy risk.

Lam Research is a profitable, well-capitalized company with $5.45 billion of cash and $4.48 billion of debt on its balance sheet. This $966.4 million 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.

We were impressed by Lam Research’s optimistic revenue guidance for next quarter, which blew past analysts’ expectations. We were also glad its adjusted operating income outperformed Wall Street’s estimates. Zooming out, we think this was a solid quarter. The stock traded up 4.7% to $69.73 immediately following the results.

Updated: July 10, 2025 at 10:19 PM EDT

Are you wondering whether to buy Lam Research or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Lam Research is a fine business. To kick things off, its revenue growth was solid over the last five years. Plus, Lam Research’s stellar ROIC suggests it has been a well-run company historically, and its impressive operating margins show it has a highly efficient business model.

Lam Research’s P/E ratio based on the next 12 months is 26.7x. Looking at the semiconductor landscape right now, Lam Research trades at a pretty interesting price. If you trust the business and its direction, this is an ideal time to buy.

Wall Street analysts have a consensus one-year price target of $95.44 on the company (compared to the current share price of $101.26).