Lam Research's Q2 Earnings and China Dependency: Is the Stock a Buy or Sell?

The recent earnings report from Lam Research (LRCX) has ignited a heated debate among investors. On one hand, the company delivered record-breaking revenue of $5.17 billion in Q2 2025, a 9.6% sequential increase, with non-GAAP EPS surging 27.9% year-over-year to $1.33. On the other, the stock price dropped 7% post-announcement, driven by concerns over its 35% China revenue exposure. This divergence between performance and market sentiment raises a critical question: Is the recent decline in Lam's stock price a buying opportunity, or does it signal deeper vulnerabilities in the company's geographic concentration and regulatory risks?

Strong Financials, But at What Cost?

Lam's Q2 results underscore its dominance in the semiconductor equipment sector. The company's gross margin expanded to 50.1% (U.S. GAAP) and 50.3% (non-GAAP), while operating income as a percentage of revenue hit 34.4%. These metrics reflect operational excellence in a sector grappling with inflation and supply chain bottlenecks. The guidance for Q3 2025—$5.2 billion revenue ± $300 million—further reinforces confidence in its ability to capitalize on AI-driven demand for advanced packaging and memory technologies.

However, the elephant in the room is China. The region's contribution to revenue rose to 35% in Q2, up from 31% in Q1, despite U.S. export controls that management estimates could cost $700 million in 2025. While domestic Chinese foundries and memory manufacturers are upgrading to advanced nodes, the geopolitical risks remain acute. A tightening of U.S. sanctions or a shift in China's domestic chipmaking strategy could disrupt this growth trajectory.

Valuation Metrics: A Mixed Bag

Lam's valuation appears stretched relative to its peers. The company trades at a forward P/E of 27.2x and an EV/EBITDA of 20.48x, both above the semiconductor equipment industry averages of 22.5x and 19.5x, respectively. While its price-to-book ratio of 13.31x reflects strong asset utilization and market confidence, it also suggests investors are pricing in a high degree of optimism about AI and advanced packaging demand.

The China Factor: Opportunity or Overhang?

China's role in Lam's business is a double-edged sword. On the one hand, the country's push for domestic semiconductor capacity creates a tailwind for the company's deposition and etch tools, which are essential for advanced nodes. On the other, the U.S. government's scrutiny of technology transfers and the potential for further export restrictions pose a near-term threat.

The recent 7% stock price dip post-earnings may reflect an overreaction to these risks. While China's share of revenue is expected to decline year-over-year, it remains a critical growth engine. Lam's leadership in gate-all-around (GAA) and dry EUV photoresist technologies positions it to benefit from long-term structural trends in AI and HBM, even if short-term headwinds persist.

Investment Implications

For long-term investors, the recent correction may present an opportunity to buy into a company with a strong balance sheet ($6.4 billion in cash) and a dominant position in high-growth areas. Lam's plans to return 85% of free cash flow to shareholders through buybacks and dividends add to its appeal. However, the risks of overexposure to China cannot be ignored. Diversification into U.S.-based manufacturing (e.g., TSMC's Arizona expansion) and non-China Asian markets (e.g., South Korea, Taiwan) could mitigate some of these concerns.

That said, the stock's elevated valuation and regulatory uncertainties warrant caution. Historical backtesting of LRCX's earnings releases from 2022 to 2025 reveals a 40% win rate over 3 days, but a stronger 80% win rate over 10 days and 60% over 30 days. While the average 3-day return post-earnings is slightly negative (-0.21%), the 10- and 30-day periods show more favorable outcomes, suggesting that short-term volatility often resolves into positive trends for long-term holders. This aligns with the company's long-term growth trajectory but underscores the need for patience during post-earnings dips. Investors should monitor the pace of China's semiconductor self-reliance efforts and the U.S. government's policy stance. A 10-20% allocation to Lam within a diversified portfolio could balance its growth potential with risk management.

Conclusion

Lam Research's Q2 earnings highlight its resilience and technological leadership, but the China dependency remains a wildcard. The recent stock price decline may be an overreaction to short-term risks, but it also serves as a reminder of the geopolitical volatility inherent in the sector. For investors willing to navigate these complexities, Lam offers a compelling mix of innovation and cash flow generation. However, the key to unlocking value lies in carefully weighing the company's long-term growth prospects against the near-term uncertainties of its largest market.

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