Lam Research (LRCX -0.28%) has rallied in grand fashion the last six months. The stock is up nearly 70% since its multiyear lows set in mid-October 2022, rising in tandem with many other beaten-down semiconductor stocks. Along the way, the chip-manufacturing equipment company has continued doling out its consistent (and growing) dividend payment too, which currently yields 1.4% a year.
Data by YCharts.
Lam Research shares climbed once more following the company's quarterly earnings report for the first three months of 2023. Is it time to buy this top semiconductor dividend stock?
The chip downturn is in full force
Lam Research's latest quarter, ended in March 2023, was as expected: ugly. Revenue and profitability metrics were just above the midpoint of management's guidance provided a few months prior. Revenue was $3.87 billion (down 5% from a year ago). On a generally accepted accounting principles (GAAP) basis, gross margin was 41.5% (down from 44.7% last year). And earnings per share (EPS) came in at $6.01 (down 18% from last year).
Basically, 2023 started horribly, but I can't emphasize enough that this financial result was expected. This general downturn has been coming and explains why Lam -- as well as semiconductor stocks overall -- got blasted in 2022. Indeed, Lam has been following the general path of chip stocks (as measured by the iShares Semiconductor ETF) the last few years, running up during the early pandemic, crashing, and now rallying again amid a nasty downturn driven by falling consumer purchases of smartphones and PCs.
Data by YCharts.
The fourth quarter of calendar year 2022 represented peak "chip shortage" equipment revenue for Lam, since these big, expensive pieces of machinery take a while to be built and delivered. Thus, next quarter will be even worse than this last one. For the three-month period that will end in June 2023, Lam is expecting another sequential decline in financial results. At the midpoint of guidance, revenue is expected to be $3.1 billion (down 33% year over year), gross profit margin at 43.2% (versus 45.3% last year), and EPS at $4.32 (down 51% year over year).
Why the rally amid bad quarterly reports?
The numbers are getting horrific, so why the market exuberance with Lam stock as of late? It's all about the future and, specifically, the future beyond the next couple of quarters.
A new bull market for memory chips is coming -- eventually. Top memory chipmakers like Micron Technology have already been cutting production to help shore up the current environment of oversupply, and even giant Samsung has finally followed suit. When memory chipmakers cut current production, it sets up the next future period of undersupply, which means rising memory prices and intense investment from these manufacturers as they scale up and upgrade their tech processes.
Since over half of Lam's research is tied to the memory chip market (historically, anyways), this will be great news. In the last quarter, only one-third of Lam's sales went to memory chipmakers as customers like Micron have slashed equipment-spending plans for this year, but that situation won't last forever.
Secular trends are also shifting. The U.S., Europe, Japan, South Korea, and other countries are increasingly interested in diversifying the world's semiconductor manufacturing. The U.S. CHIPS Act is accepting applications for government funding in the U.S., and Europe just passed the EU Chips Act. With new semiconductor fabrication plants, or fabs, getting planned, companies like Lam could have lots of new equipment to sell in the coming years.
Time to buy?
Ultimately, I like some of Lam's peers like Applied Materials a bit more at this time. After all, following the big rally in recent months, Lam Research stock isn't exactly cheap at 15 times trailing-12-month EPS and 18 times trailing-12-month free cash flow -- not with profitability metrics headed in reverse in the next quarter or two (which will raise the per-share premium, assuming the stock price stays the same).
Basically, I think a couple of other top semiconductor stocks are a more timely buy at the moment.
Nevertheless, I'm still calling Lam Research a cautious buy, especially for long-term investors interested in collecting an established dividend payer and dividend raiser. 2023 could be bumpy, but this is a great company to consider adding if you plan to hold for at least the next three to five years.
