Lam Research Stock Falls Amid Weak Guidance from Rival Applied Materials

Lam Research stock fell 6.9% after rival Applied Materials reported strong earnings but weak guidance, citing weak spending on semiconductor manufacturing equipment in China and elsewhere. Applied Materials warned Q4 profits will be down sequentially and below analyst forecasts, citing digestion of capacity in China and non-linear demand from leading-edge customers. Lam Research stock is not cheap, making it a potential sell.

Applied Materials (AMAT) reported strong third-quarter (Q3) earnings, with revenue of $7.3 billion, an 8% year-over-year (YoY) increase, and non-GAAP earnings per share (EPS) of $2.48, a 17% YoY increase. The company's Semiconductor Systems segment, which accounts for 74% of revenue, surged 10% YoY to $5.43 billion, driven by demand for leading-edge logic and DRAM technologies. Despite these impressive results, AMAT's Q4 revenue guidance of $6.7 billion, below the $7.34 billion consensus, triggered a 14% selloff in its stock.

The selloff was primarily driven by three factors:
1. China's Capacity Digestion: After a period of overinvestment, Chinese customers are moderating spending, reducing AMAT's China revenue contribution from 35% in Q3 to an expected decline in Q4.
2. Non-Linear Demand from Leading-Edge Customers: Companies like TSMC are prioritizing fab timing and market concentration, leading to uneven order patterns.
3. Export License Delays: A backlog of U.S. government approvals has created near-term visibility risks.

Despite these challenges, AMAT maintains structural advantages in advanced packaging, U.S. onshoring, and AI/IoT demand. The company's 30% market share in deposition tools and $5.4 billion in cash reserves provide a strong foundation for future growth.

Lam Research (LRCX), a rival in the semiconductor equipment market, saw its stock fall 6.9% following AMAT's earnings report. LRCX's stock is currently trading at a forward P/E of 23.02 and a price-to-book ratio of 13.79, making it more expensive than AMAT, which has a forward P/E of 18.74 and a price-to-book ratio of 8.04. This discrepancy suggests that investors are more cautious about LRCX's valuation given the current market conditions.

AMAT's Q3 success and Q4 caution present a classic case of buying strength in a high-conviction, long-duration business. The key is to balance patience with prudence, ensuring that the dip aligns with your risk tolerance and time horizon.

References:
[1] https://www.ainvest.com/news/applied-materials-q3-earnings-success-overshadowed-q4-guidance-signals-strategic-buy-opportunity-2508/
[2] https://finance.yahoo.com/news/high-purity-gas-market-projected-062700475.html