Introduction

At the beginning of May this year, I analyzed the performance of Lam Research Corporation (LRCX) for the quarter ended in March and concluded that the company's growth was strong and profit margins were continuously expanding. However, at that time, I believed the company had significant exposure to potential risks in the Chinese market, and its premium valuation seemed to fully reflect robust fundamentals, leading me to maintain a relatively cautious stance.

【Original image location: Rating History (Seeking Alpha)】

Following that update, Lam Research's stock saw a decent rally, but after peaking at the end of June, the stock has since experienced a noticeable pullback. At the end of July, this chip equipment giant announced its earnings for the quarter ended in June. Today, we will look at this data and how Lam Research plans to further strengthen its competitive advantage. Ultimately, the goal of this article is to assess whether this summer pullback presents a buying opportunity.

Growth is Accelerating

【Original image location: Lam Research Revenue Growth Chart (YCharts)】

From Lam Research's revenue performance in the June quarter of fiscal year 2026, it is evident that the tailwind from AI is at play and likely further strengthening. The company achieved total revenue of $6.72 billion, a year-over-year increase of 30%, indicating that revenue growth is accelerating.

Lam Research is more accustomed to reporting sequential changes, and as shown in the chart above, the sequential growth rate is also impressive. In fact, compared to the March quarter, the company’s revenue grew by 15%, one of the largest quarter-over-quarter increases seen in recent years, with a significant lead indicating very strong industry tailwinds. Lam Research's revenue also exceeded analyst expectations by $50.93 million, further indicating that the company’s actual business activities are outperforming market expectations.

Another indicator reflecting the current strong demand is the inventory turnover rate, which improved from 2.9 times in the March quarter to 3.0 times, compared to just 2.4 times in the same period last year. This suggests that the company’s products are not sitting in inventory for long periods.

Tailwinds in Storage Business Are Very Apparent

【Original image location: Revenue Breakdown of Storage Business (Lam Research June Quarter Slides)】

Further examining the company's revenue structure, it is clear that the storage business has been an important growth driver for Lam Research. Given the current tight supply situation in the storage market, this is not surprising. As shown in the right chart, in the June quarter of fiscal year 2026, the storage business accounted for 46% of the company's system revenue, up from 39% in the previous quarter and 41% in the same period last year. This is a clear signal indicating that chip manufacturers are actively purchasing equipment to expand production capacity for storage chips. Interestingly, while the proportion of DRAM in system revenue actually declined slightly quarter-over-quarter, it has increased significantly year-over-year, suggesting that demand for storage consumption from data centers remains strong. Considering that many storage chip manufacturers are focusing on increasing long-term capacity, I believe the storage business will continue to provide tailwinds for Lam Research in the coming quarters and even years. Therefore, I would not be surprised if the proportion of storage business in revenue continues to increase in the future.

Risks in Chinese Market are Declining

【Original image location: Revenue Breakdown by Region (Lam Research June Quarter Slides)】

In my previous article, I noted that the Chinese market was becoming an increasing risk for Lam Research. However, in the June quarter, this risk appears to have alleviated. As shown in the right chart, the company derived 26% of its revenue from China in the June quarter, a significant decline from 34% in the previous quarter and 35% in the same period last year. This indicates that the company’s dependence on a market with high geopolitical and regulatory risks is decreasing. More notably, Lam Research has managed to accelerate overall revenue growth while reducing its reliance on the Chinese market, which is quite impressive. This also demonstrates how strong the demand for the company’s equipment is outside of China. However, investors should still be cautious of some persistent risks. As shown in the chart above, China remains the company’s second-largest regional market, meaning Lam Research could still be impacted by U.S. export controls or changes in government policy in China.

Strong Profit Margins

【Original image location: Lam Research Margin Performance (Lam Research June Quarter Slides)】

In addition to strong growth, Lam Research delivered an excellent profit performance in the June quarter of fiscal year 2026. Firstly, the company expanded its non-GAAP gross margin both quarter-over-quarter and year-over-year. In the March quarter, the reported non-GAAP gross margin was 49.9%, down from 50.3% in the same period last year. It is evident that the business mix has played a significant role in improving the gross margin. Both quarter-over-quarter and year-over-year, the growth rates of customer support-related revenues and other businesses have outpaced system revenues, with the former inherently having higher profit margins. Furthermore, the growth in gross margins may reflect the company’s strong pricing power in a tight supply market.

For the non-GAAP operating margin, as shown in the chart above, the company achieved 38.4% in the June quarter, significantly higher than the 35.0% in the previous quarter and also above last year’s 34.4%. This expansion is even more notable than the gross margin, indicating that Lam Research has exhibited exceptional control over operating expenses. On the profit side, the company reported adjusted EPS of $1.82, a year-over-year increase of 37%, exceeding analyst consensus estimates by 8.10%, showcasing very strong performance. Therefore, current profitability is clearly not a concern for investors.

Another noteworthy change is the significant decline in the scale of the company's stock buybacks. In the March quarter, the company repurchased shares worth $796 million, while in the June quarter of fiscal year 2025, the repurchase amount reached $1.307 billion. However, in this June quarter, the company only repurchased $246 million in stock. This may indicate that the company believes its stock price is somewhat expensive at the moment, and continuing to buy back shares could rather erode shareholder value. We will take a closer look at the company's valuation later.

Financial Outlook

【Original image location: Lam Research September Quarter Guidance for Fiscal Year 2026 (Lam Research June Quarter Slides)】

For the September quarter of fiscal year 2026, the company expects revenue of about $8.1 billion, significantly exceeding the market consensus estimate and implying a year-over-year growth of 52%. This represents a further remarkable acceleration from the already impressive growth in the June quarter. At this stage, although some people still worry that the semiconductor boom may end soon, the reality appears to be in stark contrast, with industry tailwinds seemingly strengthening.

For the non-GAAP gross margin, the company expects it to reach 52.0%, up from 50.6% in the same period last year. Thus, the growth of customer support-related revenue could continue to outperform other businesses, and the company’s pricing power should remain strong. Similar to the June quarter, the expansion rate of the operating margin in the September quarter is also expected to outpace the gross margin expansion, indicating that the company’s cost discipline will persist. On the profit side, the company anticipates EPS to reach $2.15, a year-over-year increase of 71%, which further underscores that profitability is definitely not a current concern.

Taking a longer-term perspective, investors can observe more positive signals. First, the company emphasizes that the business environment for CY2027 and beyond is "extremely outstanding." The company stated, "Customers have announced multiple timelines for new wafer fabrication projects that will last for several years." This further reinforces the logic that industry tailwinds are sustainable. Furthermore, during the earnings call, Executive Vice President Bettinger mentioned that the company's goal in the coming years is to raise gross margins to the mid-50% range and operating margins to the mid-40% range. Therefore, Lam Research's best days are likely still ahead.

Investment Innovation

Undoubtedly, one of Lam Research's long-term core competitive advantages is innovation. In a world where semiconductor performance is crucial, whoever leads the technology can drive customer adoption and continuously expand market share. Recent developments indicate that Lam Research is undertaking a considerable investment to further strengthen its competitive edge through innovation.

In mid-August this year, the company announced that it would invest $3 billion in its R&D laboratory network over the next five years. In a press release, CEO Tim Archer stated:

In the age of AI, the speed of innovation is extremely rapid, which requires chips to adopt new architectures, different materials, and complex structures manufactured with nanometer precision. Our ability to speed up the entire R&D process has become a decisive competitive advantage.

This aligns with the point I just expressed above. It is important to note that these R&D investments are not some distant long-term goal, but rather the company is currently ramping up its investments. Just days ago, Lam Research held a groundbreaking ceremony for its R&D center located in Tualatin, Oregon. COO Sesha Varadarajan stated:

Our new advanced laboratory in Oregon is expected to further strengthen the company’s expertise and add thousands of square feet of highly valuable cleanroom space, which will help us work more closely with customers while enhancing the capabilities and reach of our global laboratory network.

In addition to enhancing its own innovation capabilities and reinforcing competitive advantages, I believe these investments and commitments also reaffirm management's strong confidence in the sustainability and durability of future AI tailwinds.

The Current Risk-Reward Ratio Has Become Attractive

【Original image location: Lam Research Forward P/E Ratio Chart (YCharts)】

At the end of June, Lam Research’s forward P/E ratio was still above 70 times. Since then, the stock price has corrected, but it should be clear that the significant decline in valuation multiples has also been driven by the market continuously raising growth expectations. The current forward P/E ratio has dropped to 31.87 times, down from the 45.25 times seen in my previous update. I believe the current risk-reward ratio has become attractive for investors.

Today’s analysis already indicates that the company’s revenue growth is accelerating, and profit margins are improving. The inventory turnover rate suggests that market demand remains robust, while the storage business has clearly become an important catalyst for the company's business growth. China remains an important risk for investors to monitor, but the company’s dependence on this market has declined. Furthermore, with the strong guidance for the September quarter and the company's ongoing investments in innovation, I believe Lam Research's business outlook has significantly improved recently.

Since my last update, Lam Research's stock price has risen about 13%, thus reiterating that the contraction in valuation multiples is mainly due to the market continually raising earnings targets. However, even with the rise in stock price, the current risk-reward ratio still seems to have improved. As of this writing, Seeking Alpha shows that Lam Research’s forward non-GAAP PEG ratio is only 1.19 times, even slightly below the median in the IT industry. For a key driver of the AI revolution that we are familiar with, I believe such a valuation implies opportunity.

Conclusion

Over the past 52 weeks, Lam Research's stock price has increased by more than 200%, and undoubtedly, some investors may feel they have missed this rally. However, after today’s analysis, I believe there remains a significant probability that the company’s stock price will continue to outperform the market from this point onwards. In summary, since my last update, both Lam Research’s fundamentals and business outlook have generally strengthened, while risks have decreased. Meanwhile, valuations have returned to more reasonable levels, and in my view, the risk-reward ratio has clearly shifted in favor of the bulls. For those who have been waiting to establish their first position or wish to add to their existing positions, I believe the recent stock price pullback since the end of June has created a good opportunity to enter. Therefore, I am upgrading Lam Research's rating to "Buy."

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