Why Lam Research Stock Got Clobbered Today

Key Points

• Applied Materials reported strong earnings but gave weak guidance last night.

• The Lam Research rival sees weak spending on semiconductor manufacturing equipment in China -- and everywhere else.

• 10 stocks we like better than Applied Materials ›

Lam Research (NASDAQ: LRCX), one of a handful of large companies manufacturing equipment for the production of semiconductors, tumbled 6.9% through 1:45 p.m. ET this afternoon. As unbelievable as it may sound, you can blame one of Lam's big rivals, Applied Materials (NASDAQ: AMAT), for Lam's troubles.

Image source: Getty Images.

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Applied Materials' big warning for semiconductor investors

Applied Materials reported strong earnings for its third quarter fiscal 2025 last night. Analysts expected Applied to earn only $2.36 per share on sales of $7.2 billion, but Applied said it actually earned $2.48 per share, and sales were stronger than expected at $7.3 billion.

So far, so good. But Applied Materials then proceeded to tell investors what it expects to do in Q4 of this year -- and that's where things fell apart.

Is it time to sell Lam Research?

Citing a "dynamic macroeconomic and policy environment, which is creating increased uncertainty and lower visibility in the near term," Applied Materials warned that Q4 profits will be only about $2.11 per share, down sequentially, and well below Wall Street analyst forecasts for $2.38 per share.

Of particular note, Applied warned that Q4 revenue will decline due to "digestion of capacity in China" (i.e., China has already bought a lot of semiconductor manufacturing equipment) and "non-linear demand from leading-edge customers given market concentration and fab timing" (i.e., China's not the only buyer that's already bought a lot of equipment). As a result, Applied Materials is warning that sales that grew to $7.3 billion in Q3 will probably shrink to $6.7 billion in Q4.

That's about 8% worse than Wall Street was expecting. Investors are now worried that the same thing might happen to Lam's stock. Seeing as though, at 26 times earnings, Lam stock is already not cheap, it might be time to sell.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Applied Materials and Lam Research. The Motley Fool has a disclosure policy.