Lam Research (LRCX): Record Quarter, Blowout Guide — So Why Are We Saying AVOID?

Lam Research Corporation (LRCX) Q4 FY2026 — Lam Research (LRCX), one of the four indispensable wafer-fab equipment makers alongside ASML, Applied Materials and KLA, reported fiscal Q4 2026 (quarter ended June 28, 2026) after the close on July 29: revenue $6.722B (+30.0% YoY, +15.1% QoQ), GAAP diluted EPS $1.81 and non-GAAP $1.82 (vs $1.68 consensus), GAAP gross margin 51.7% and operating margin 37.4% — records on essentially every line and above the high end of guidance. The real news was the guide: September-quarter revenue of $8.10B +/- $400M against a ~$7.09B consensus, with EPS of $2.15 vs $1.83 expected, gross margin 52.0% and operating margin 39.5% — above the top of Lam's own prior long-term model. FY2026: revenue $23.233B (+26.0%), net income $7.265B (+35.6%), diluted EPS $5.76. Under-covered: CSBG (installed-base spares/service on 100,000+ chambers) grew 42.6% YoY to $2.472B, FASTER than systems (+23.6%), and is now ~37% of revenue; China collapsed from 34% of revenue in March to 26% in June, with China dollars actually DOWN ~12% sequentially while total revenue rose 15% — every dollar of sequential growth came from outside China (Taiwan is now #1 at 27%); and FY26 free cash flow FELL 9.7% to $4.891B even as net income rose 36%, as receivables jumped 58% YoY and DSO stretched from 59 to 72 days, dropping cash conversion from 101% to 67%. Credit where due: Lam does NOT add back stock compensation — non-GAAP EPS $1.82 vs GAAP $1.81, a one-cent gap — and management cut buybacks to $247M in the June quarter (from $1.16B at ~$211/sh in March) while the stock made all-time highs above $430. Our normalized owner-earnings DCF on $9.3B of mid-cycle owner earnings (mid-cycle revenue $30B at a 37% operating margin, 9% discount, 3.75% terminal) lands fair value at $184 vs $264.30 after hours on July 29 — the price sits ~44% above value, ~30% downside. The reverse DCF says $264.30 requires ~11% owner-earnings growth every year for a decade, implying ~$80B of revenue by 2036 against a total WFE market of ~$140B today. Our call: AVOID, 4/5 — a superb business at a price that capitalizes the peak. Wall Street is at a $372.76 average target (39 buy / 10 hold / 1 sell), so we DIFFER sharply. Lam Research (LRCX) just printed the best quarter in its history and then guided even higher — and we still think you should avoid the stock at this price. That tension is the whole episode. Fiscal Q4 2026 (quarter ended June 28, 2026, reported after the close July 29): revenue $6.722B, up 30% YoY and 15% sequentially; GAAP diluted EPS $1.81, non-GAAP $1.82 against a $1.68 consensus; GAAP gross margin 51.7% and operating margin 37.4% — records, all above the high end of guidance. Then management guided the September quarter to $8.10B +/- $400M versus a ~$7.09B consensus, with EPS of $2.15 vs $1.83 expected and a 39.5% operating margin that sits above the top of Lam's own long-term model. Full-year FY2026 revenue was $23.233B (+26%) with net income of $7.265B (+36%) and diluted EPS of $5.76. We push past the headline into three things almost nobody covered. First, the Customer Support Business Group — spares, service and upgrades across an installed base of more than 100,000 process chambers — grew 42.6% YoY to $2.472B, FASTER than the systems business at +23.6%, and is now nearly 37% of revenue; though we're honest that CSBG also contains Reliant trailing-edge tools, so it isn't a pure annuity. Second, China fell from 34% of revenue to 26% in a single quarter, and in absolute dollars China revenue DECLINED about 12% sequentially while total revenue rose 15% — meaning every dollar of sequential growth came from outside China, with Taiwan now the largest region at 27%. The export-control and local-competition bear case has largely already been absorbed: China was 42% of revenue in FY2024. Third, and least discussed, free cash flow went backwards: FY26 FCF fell 9.7% to $4.891B while net income rose 36%, because receivables jumped 58% YoY against 30% revenue growth, pushing DSO from 59 to 72 days and consuming $1.9B of cash. Cash conversion dropped from 101% of earnings to 67% — which is why the stock trades at 46x trailing GAAP earnings but 68x trailing free cash flow. Two things deserve genuine credit: Lam fully expenses stock compensation (non-GAAP EPS $1.82 vs GAAP $1.81 — a one-cent gap, with only intangible amortization reconciling), and management cut buybacks to $247M in the June quarter from $1.16B at roughly $211/share in March, refusing to chase all-time highs above $430. On valuation we normalize explicitly rather than capitalizing a record: mid-cycle revenue of $30B at a 37% operating margin, taxed at 13%, plus D&A less maintenance capex and a working-capital drag, gives $9.3B of mid-cycle owner earnings, or $7.43 per share. At a 9% discount rate with 6.5% growth for a decade and a 3.75% terminal rate, our base case is $184 (bear $127, bull $252). Against $264.30 after hours on July 29 — versus a $252.35 pre-print close, itself 42% below the June 30 closing high of $433 — the price sits about 44% above our value, roughly 30% downside. The reverse DCF is the sharper number: $264.30 requires ~11% owner-earnings growth every year for ten straight years off that mid-cycle base, taking owner earnings to ~$27B by 2036 and implying roughly $80B of revenue, about 3.5x FY2026, when the entire wafer-fab equipment market today is around $140B. Not impossible — but it prices the bull case as the base case with no down year in a decade, in an industry that has never gone a decade without one. Our call: AVOID, 4/5. This is a price objection, not a business objection. Wall Street's average target is $372.76 with 39 buys and one sell, so we DIFFER sharply — and we note most of those targets were set while LRCX traded between $300 and $438. Not financial advice. THE CALL: AVOID (4/5, AN EXCELLENT BUSINESS AT A PRICE THAT CAPITALIZES THE PEAK — A VALUATION CALL, NOT A BUSINESS CALL) — base-case value ~$184.00 vs ~$264.30 today. What to watch: free cash flow catching back up to earnings — days-sales-outstanding heading back toward 60 from 72 and cash conversion recovering from 67% toward 100% — plus the $40B NAND conversion wave actually landing in systems revenue rather than remaining optionality at ~12% of systems, and a long-term financial model update that makes 39.5% operating margins look structural rather than peak, would move us up materially; a price in the $180s reaches our base value and the $150s would be compelling at roughly 20x mid-cycle owner earnings; the risk to respect is the opposite — a single memory digestion quarter, a renewed China export-control tightening against a region still worth over $1.7B a quarter, or receivables stretching further, any of which hits a stock carrying no valuation cushion at 46x trailing earnings Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.