Introduction to Lam Research

Lam Research ranks among the top three companies worldwide in the semiconductor processing equipment industry, with a primary focus on wafer fabrication equipment manufacturing. The company specifically focuses on etching and deposition equipment, which are two very important steps to the creation of a chip.

Semiconductor production begins with a wafer—the foundational substrate, typically made of silicon (Si)—which undergoes a series of key manufacturing steps: photolithography, etching, doping, deposition, chemical mechanical planarization (CMP), followed by testing and packaging.

Each of these stages is essential to the fabrication of a functional semiconductor. Lam primarily focuses on developing equipment for two of these processes, etching and deposition, where it holds approximately 35.00–45.00% and about 29.00% of the market share, respectively. While Lam’s overall share of the global semiconductor equipment market is around 11.00%, this position remains strategically strong, particularly in light of the anticipated growth of the semiconductor industry.

Future Potential

The demand for semiconductors is expected to grow rapidly in the next 10 years, with the semiconductor market size expected to increase from 627.76B in 2025 to 1.20T in 2034. This growth is driven mainly by AI, but also by the automotive sector.

One thing that has to be taken into account is the company's areas of operation. Lam Research’s heavy reliance on Asia presents several strategic risks despite the region’s growth potential. With roughly 90% of revenue generated in Asia, largely from South Korea, Taiwan, and China, the company is highly exposed to regional demand cycles and geopolitical instability.

As about 30-35% of product manufacturing locations are in the US, any escalation in US-China or broader geopolitical trade tensions could lead to higher import duties on US-manufactured equipment, raising costs for Asian customers or compressing Lam’s margins.

Nevertheless, taking into account that semiconductors lie at the heart of all innovation, despite some risks in the region of tariffs, we will get a B grade for the business analysis, with most segments like the Product/Services Overview or Product/Service Demand yielding an A grade but being dragged down by the said tariff risks.

Fundamentals Overview

Even though the Business of the company is looking healthy and promising, we still need to understand if the company is healthy in the sense of fundamentals like the financial growth, valuation, profitability etc...

Across all 9 Pillars Lam research got almost all A grades. This includes the net income growth, FCF growth, profit margin, dividend safety, share buybacks, and debt levels.

Lam's 10Y net income CAGR is sitting at 23.38%, FCF 10Y CAGR at 24.87%, and when we look from a quarterly perspective, these two metrics seem to be growing extremely steadily. The company has also been buying back a large number of shares, through which they are increasing their EPS, and therefore directly growing their value. Dividends are also growing at a 5Y CAGR of 14.87%, with the average 10Y FCF payout ratio being only 25.55%. A low FCF payout ratio means that Lam is able to push a lot of their FCF into before mentioned share buybacks, paying down debt, innovation etc...

Despite having almost flawless fundamentals, which would ensure an A grade, or a STRONG BUY rating, Lam is being dragged down by one thing... its valuation.

The Problem Lam Research is Facing

Being a tech company in the middle of an AI boom must be great, but with this hype often comes overvaluation, which has also come to Lam. Now this certainly does not mean the company is a bad company, that it operates incorrectly, etc... it just means that right now, paying $238.71 for one share of the stock, is like paying 100K for a good, working Ford. The car is great, but it does not justify its price tag.

Currently, the PE and P/FCF ratios of Lam are 48.68 and 45.01, respectively. To put this into perspective, the 5Y average PE and P/FCF are 23.17 and 25.43. What this means is that Lam has become twice as expensive, just in the past 6 months.

Analysts estimate that the EPS will grow at a CAGR of 18.40% through the next 4 years, but this still leaves the company with a PEG ratio of 2.64, much higher than what it was 6 months ago, 1.00; in other words, fairly or possibly undervalued. Right now, even compared to its future growth, the company seems very overvalued.

Intrinsic Value Calculation

After calculating the intrinsic value through some of the valuation models you can find on moneyssense.com, like the DCF model, Multiples Valuation, or Graham's formula, we arrived at an ultimate intrinsic value of 153.62, which would mean that Lam is currently overvalued by about 36.00%.

Conclusion

In conclusion, Lam Research is a well-positioned company that has a lot to gain from the semiconductor boom. They are an established player in etching and deposition and, despite competition, manage to keep a leading position. The company is set to grow with the increasing demand for semiconductors.

The issue is the current valuation. Despite high projected growth, the company is just too expensive. We can see this both through the valuation ratios and the intrinsic valuation itself. My final recommendation would be to hold the company until the valuation becomes at least somewhat more reasonable.