If you were to review current headlines, you might conclude the semiconductor industry is in total disarray. With PC and smartphone sales still down in the dumps (at least when compared to blistering sales levels in 2020 and 2021), there's at least a quarter or two of pain left before the chip industry returns to growth again.
However, when looking at stock prices, the chip downturn would appear to be over. Case in point, shares of chip fab equipment company Lam Research (LRCX +1.19%) are up nearly 70% from multi-year lows they hit in autumn 2022. What gives? And is it too late to buy this top dividend stock?
NASDAQ: LRCX
Key Data Points
It's all about the future, and the future is silicon
Lam Research is a chip fab equipment manufacturer. It makes the machines that chip fabs (companies that operate chip manufacturing facilities) use to make wafers (the silicon disks that eventually get cut up into "chips"). Lam competes with the likes of Applied Materials and Tokyo Electron, with machines that deposit chemicals onto, etch tiny patterns into, and fill patterns and holes with conductive metals in those wafers.
With chipmaking interest picking up steam in the U.S., Europe, South Korea, and Japan, there's going to be plenty of demand for Lam's equipment in the coming years. But for now, the company is getting blasted due to its high exposure to memory chips -- a commoditized component that tends to get hit especially hard during semiconductor industry down cycles. In its last reported quarter (the three months ended December 2022), half of Lam's sales came from memory chip fabs.
Starting with the just-finished March 2023 quarter (which hasn't been reported yet), Lam expects an end to its recent run-up in revenue since 2020 (sales roughly doubled the last three years). Wall Street analysts expect Lam's sales to fall by a mid-teens percentage this year, in keeping with the general expected trend for chip fab equipment.
So why the rally in Lam Research stock in recent months? As is the case with all stocks, but especially the semiconductor industry, businesses are valued based on their futures, not the current reality. And dozens of new chip fabs are early in construction or just being planned. As one of the five largest fab equipment companies, Lam is in fantastic shape to enjoy years of profitable growth once the current cyclical slump is over.
When will Lam's financial pain subside?
Even after the big rebound in stock price, Lam stock trades for less than 14 times trailing 12-month earnings. It looks cheap, but that metric is likely to deteriorate throughout this year as Lam's revenue (and thus earnings per share) declines.
But by the middle of fiscal 2024 (for Lam, that corresponds to the end of calendar year 2023) things are expected to start rocking again. Indeed, with dozens of new fabs breaking ground last year, and dozens more beginning construction in 2023, Lam will have lots of new facilities to place equipment in. It takes years for a new chip fab to get up and running, so new construction now means new revenue streams for Lam a couple of years down the road.
Time to go shopping?
Lam stock's current valuation can't be taken at face value, given that its financials are going to get hit in the next few quarters by the present downturn. Memory chipmakers in particular are getting crushed. Samsung just cut production of memory chips in response to plunging profits. Though I'm optimistic on the company's long-term potential, I'd caution investors about buying too much of this stock right now (although it's important to remember that deep cuts to memory chip production tend to signal the final stages of a chip market downturn).
Lam is in good shape. Even in cyclical slumps, it tends to remain highly profitable and able to fund its growing dividend payment (currently yielding 1.4% a year). Management also supplements those dividends with plenty of stock buybacks to boost earnings per share, especially during periods when it feels the share price is undervalued.
Data by YCharts.
I ultimately prefer some of Lam Research's peers at the moment, like Applied Materials. Nevertheless, Lam could be a compelling value for dividend investors looking for growth and income over the long term. Put this top semiconductor stock on your watchlist at the very least.
