Tech stocks have taken a hit in 2022 and semiconductor manufacturing equipment maker Lam Research (NASDAQ: LRCX) is no exception. This year, its share price is down about 34%.
I already have a small holding in Lam as I’m quite bullish on the long-term growth story. Is now a good time to buy more stock for my portfolio? Let’s discuss.
At the heart of a powerful megatrend
While investors seem to have lost interest in technology shares this year, the long-term growth story here is still very much intact, to my mind.
Semiconductors, or ‘chips’, are a very important part of the global economy. Today, they power almost all electronic devices including smartphones, computers, kitchen appliances, and electric vehicles. As the world becomes even more digitalised in the years ahead, demand for chips should rise.
But here’s the real kicker. Over the next decade, we’re likely to see countries all over the world build semiconductor plants domestically in an effort to minimise supply chain disruption (around 90% of advanced semiconductors are manufactured in Taiwan today).
This kind of activity should provide a huge boost for Lam Research as its innovative wafer fabrication equipment plays a crucial role in the chip manufacturing process. In fact, Lam says that today, nearly every advanced chip is built with its technology. So the future looks very exciting, to my mind.
I’ll point out that Wall Street analysts expect revenue growth of 15% for the year ending 27 June and 16% for the following year.
Bargain valuation
After the recent share price fall, the stock now looks cheap. With analysts forecasting earnings per share of $38 for the year ending 27 June 2023, the P/E ratio here is just 12.5. That’s an attractive valuation, in my view.
One person who clearly sees some value at current levels is board member Catherine Lego. Recently, she spent about $800,000 on Lam Research stock. It’s worth noting that Lego – who joined the board in 2006 – has considerable experience in the semiconductor investing space. Previously, she was a general partner at Oak Investment Partners, focused on the semiconductor industry. I see her $800k buy as very encouraging.
Additionally, the company recently authorised a $5bn share repurchase. This suggests management thinks the stock is cheap too.
Risks
Now I need to point out that, like many other companies, Lam is experiencing some supply chain and cost challenges right now. These issues are impacting profitability.
For the quarter ended 27 March, operating income as a percentage of revenue was 29.4%. In Q1 2021, it was 31.6%. The company described the supply environment as “extraordinarily difficult”.
These challenges could persist for a while so this is a risk to be aware of.
However, the good news is that management was confident in the long-term growth story: “We remain confident in the secular drivers of wafer fabrication equipment investment as well as Lam’s leadership position and expect to return to solid growth as industry constraints ease,” said president and CEO Tim Archer.
Lam Research: my view now
In light of all of the above, I’d be happy to buy more Lam Research shares today. In my view, Lam is a high-quality company with a very bright future.
I think the recent weakness has provided me with a great buying opportunity.