– By GF Value
The stock of Lam Research (NAS:LRCX, 30-year Financials) appears to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $548.03 per share and the market cap of $78.3 billion, Lam Research stock gives every indication of being significantly overvalued. GF Value for Lam Research is shown in the chart below.
Because Lam Research is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 15.6% over the past three years and is estimated to grow 11.96% annually over the next three to five years.
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Lam Research has a cash-to-debt ratio of 1.04, which is in the middle range of the companies in Semiconductors industry. The overall financial strength of Lam Research is 6 out of 10, which indicates that the financial strength of Lam Research is fair. This is the debt and cash of Lam Research over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Lam Research has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $11.9 billion and earnings of $20.16 a share. Its operating margin is 28.68%, which ranks better than 92% of the companies in Semiconductors industry. Overall, the profitability of Lam Research is ranked 9 out of 10, which indicates strong profitability. This is the revenue and net income of Lam Research over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus’ research has found that growth is closely correlated with the long-term performance of a company’s stock. If a company’s business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company’s revenue and earnings are declining, the value of the company will decrease. Lam Research’s 3-year average revenue growth rate is better than 81% of the companies in Semiconductors industry%. Lam Research’s 3-year average EBITDA growth rate is 18.5%, which ranks better than 66% of the companies in Semiconductors industry.
One can also evaluate a company’s profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Lam Research’s ROIC is 45.59 while its WACC came in at 9.37. The historical ROIC vs WACC comparison of Lam Research is shown below:
In closing, Lam Research (NAS:LRCX, 30-year Financials) stock shows every sign of being significantly overvalued. The company’s financial condition is fair and its profitability is strong. Its growth ranks better than 66% of the companies in Semiconductors industry. To learn more about Lam Research stock, you can check out its 30-year Financials here. To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener. This article first appeared on GuruFocus.