Lam Research Corporation LRCX has seen its stock price drop 17.8% over the past six months, significantly underperforming the Zacks Electronics – Semiconductors industry’s gain of 27.3%. The stock has also underperformed industry peers, including Marvell Technology, Inc. MRVL, Broadcom Inc. AVGO and Ambarella, Inc. AMBA, over the same time frame.

6-Month Price Return Performance

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This underperformance has raised questions about whether it’s a buying opportunity or a signal to exit. While Lam Research’s long-term prospects in the semiconductor space are undeniable, several short-term challenges and industry-specific headwinds suggest that selling the stock for now may be the more prudent move. Here’s why.

Declining WFE Spending to Hurt LRCX Growth

Despite the cyclical downturn for the semiconductor industry now over, wafer fabrication equipment (WFE) spending is still under pressure. Although Lam Research expects a recovery in 2025, the timeline remains uncertain, particularly for the memory segment. NAND spending, which has been a key revenue driver for Lam Research, has struggled to rebound as customers delay investments in advanced nodes like 256-layer and 384-layer technologies.

This delay directly impacts Lam’s growth prospects, as the company relies heavily on NAND orders. With more than two-thirds of NAND bits still produced on older nodes, a slow transition to advanced technologies could prolong the current revenue softness. For now, the company’s exposure to this segment creates significant uncertainty.

Rising Costs to Weigh on LRCX Profitability

In its most recent earnings report for the first quarter of fiscal 2025, Lam Research reported gross margins of 48.2%, which, while robust, were affected by unfavorable customer and product mix and rising incentive compensation costs. These factors are likely to weigh on profitability. Furthermore, the company has committed to significant research & development investments to maintain its leadership in advanced packaging and AI-driven technologies.

While these expenditures are necessary for long-term competitiveness, they may pressure near-term earnings and free cash flow. Investors seeking immediate returns may find this lack of short-term profitability unappealing, particularly given the near-term challenges.

Wall Street analysts also seem cautious about Lam Research’s near-term earnings growth potential. The Zacks Consensus Estimate for fiscal 2025 and 2026 earnings has witnessed downward estimate revisions.

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Geopolitical and Regulatory Risks: A Concern for LRCX

Lam Research’s heavy reliance on China for revenue poses another significant risk. China accounted for approximately 37% of Lam Research’s total sales in the most recent reported quarter. However, escalating U.S.-China trade tensions and tightening export restrictions on advanced semiconductor equipment are threatening this critical market.

The U.S. government has already imposed new restrictions on chip-making tools, and further regulatory changes could materially impact Lam Research’s ability to generate revenues from Chinese customers. This geopolitical overhang adds to the uncertainty surrounding the stock’s near-term performance.

LRCX’s Elevated Valuation Limits Upside

Despite its recent decline, Lam Research’s stock remains expensive, trading at a forward price-to-earnings (P/E) multiple higher than its historical averages. Also, LRCX has a Zacks Value Score of D, indicating a stretched valuation at present. This premium valuation reflects optimism about a future WFE recovery and AI-related growth, leaving little room for error. If the anticipated recovery is delayed or muted, the stock could face additional downward pressure.

Forward 12-Month Price-To-Earnings Multiple

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Conclusion: Exit LRCX for Now

While Lam Research remains a leader in the semiconductor industry with strong long-term potential, the current headwinds outweigh the opportunities. Persistent WFE market weakness, rising costs and geopolitical risks create a challenging near-term outlook.

For investors, the prudent choice is to sell Lam Research stock for now and reassess once the industry shows clearer signs of recovery. Currently, LRCX carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Lam Research Corporation (LRCX) : Free Stock Analysis Report

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