Lam Research's (LRCX -2.35%) stock has lost 35% of its value in 2022, and the company's third-quarter (which ended on March 27) fiscal 2022 results that were released on April 20 weren't good enough to revive its fortunes.
Lam's stock price fell 2.5% following the release of its results. The company's revenue and earnings fell short of Wall Street's expectations, thanks to adverse supply chain conditions that have been impacting Lam's operations since the end of 2021. Patient investors, however, now have a great opportunity to buy shares of this semiconductor-making equipment supplier on the cheap.
The booming demand for wafer fabrication equipment (WFE) has led to solid growth in Lam's deferred revenue and backlog, setting the company up for growth in the long run. Let's look at the company's latest numbers and the reasons investors should be focusing on the bigger picture instead of the near-term headwinds.
Lam Research is hamstrung by supply chain constraints
Lam Research's quarterly revenue increased 5.5% year over year to $4.06 billion, but it was at the lower end of the company's guidance range. Lam was anticipating $4.25 billion in fiscal Q3 revenue at the midpoint of its guidance range, but the company was unable to secure enough parts to complete its shipments to customers.
Additionally, Lam's expenses ballooned, thanks to higher costs for raw materials and an increase in freight and logistics rates. The company's non-GAAP gross margin fell to 44.7% last quarter, compared to 46.3% in the prior-year period, on account of cost headwinds. As a result, the company reported adjusted earnings of $7.40 per share, down from $7.49 per share in the prior-year period.
Wall Street would have been content with $7.52 per share in earnings on $4.25 billion in revenue, but Lam's numbers were way off the mark. The same can be said about Lam's guidance. It anticipates $4.2 billion in revenue for the fiscal fourth quarter, along with adjusted earnings of $7.25 per share. The consensus estimates called for $8.23 per share in earnings from Lam on $4.45 billion in revenue.
Now, Lam's results would have been much better if it had access to components that would have helped it complete shipments to customers. The company's deferred revenue balance increased $600 million last quarter to a total of $2 billion, thanks to "delays in securing critical parts needed for shipments of our tools."
So, even though Lam installed its machines at customers' sites to accelerate deployments, it couldn't recognize the revenue it generated from the sale of those machines as they were essentially incomplete due to a lack of parts.
So, Lam would have recorded much stronger growth last quarter had it not been for supply chain constraints. However, the company remains upbeat about its long-term prospects, thanks to market share gains, efforts to build the supply chain, and the health of the semiconductor manufacturing equipment industry.
Solid long-term prospects make the stock worth buying
Lam Research estimates the demand for WFE to exceed $100 billion in 2022, and any demand that remains unfulfilled is likely to move into 2023. WFE spending is estimated to have increased 39% in 2021 to just under $90 billion as per third-party estimates. The good part is the market is expected to keep growing at a nice pace in the long run and generate $175 billion in revenue by 2027.
What's more, Lam Research has been winning more business while it works to improve its supply chain. The company is tapping additional component suppliers to ensure it can source alternative components to complete its shipments. Lam believes these efforts will eventually help it improve its performance.
And finally, Lam stock is too cheap to ignore right now. Trading at just 14.5 times trailing earnings and 12 times forward earnings, Lam's valuation represents a significant discount to the S&P 500's earnings multiple of 25. The company's bright long-term prospects and supply chain improvement efforts should eventually help it regain its mojo and post stronger growth, which is also reflected in analysts' expectations of 15% annual earnings growth for the next five years.
All of this makes Lam an attractive semiconductor stock to buy despite its near-term troubles.