3 Reasons Investors Love Lam Research (LRCX)

The past six months have been a windfall for Lam Research’s shareholders. The company’s stock price has jumped 82.1%, hitting $165.75 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now still a good time to buy LRCX? Or is this a case of a company fueled by heightened investor enthusiasm? Find out in our full research report, it’s free for active Edge members.

Why Is Lam Research a Good Business?

Founded in 1980 by David Lam, the man who pioneered semiconductor etching technology, Lam Research (NASDAQ:LRCX) is one of the leading providers of wafer fabrication equipment used to make semiconductors.

1. Long-Term Revenue Growth Shows Strong Momentum

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Lam Research grew its sales at a solid 12.1% compounded annual growth rate. Its growth surpassed the average semiconductor company and shows its offerings resonate with customers. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

2. Increasing Free Cash Flow Margin Juices Financials

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Lam Research’s margin expanded by 9.4 percentage points over the last five years. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability. Lam Research’s free cash flow margin for the trailing 12 months was 28.3%.

3. Stellar ROIC Showcases Lucrative Growth Opportunities

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Lam Research’s five-year average ROIC was 64.3%, placing it among the best semiconductor companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

Final Judgment

These are just a few reasons Lam Research is a rock-solid business worth owning, and after the recent surge, the stock trades at 33.2× forward P/E (or $165.75 per share). Is now the time to initiate a position? See for yourself in our full research report, it’s free for active Edge members.

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