Lam Research (LRCX)

Shares of semiconductor fabrication equipment manufacturer Lam Research (LRCX) have been under some considerable selling pressure of late, plunging nearly 40% from peak to trough before recovering in late May. Amid recession woes and the tech sector’s ongoing valuation reset, Lam Research has been unable to make it through the rough waters unscathed.

Shares of LRCX were never alarmingly expensive, even at its peak above $700 per share. At just north of $500 per share, LRCX stock looks like a value play in tech with its modest 16.1 times trailing earnings multiple alongside a 1.2% dividend yield.

Still, the chip space has been ravaged by COVID-induced supply challenges. And with a recession likely looming, a more cyclical company like Lam Research may be among the riskier ways to play a bounce-back in the broader semi scene.

Lam Research Stock: How Will it Fare in the Next Recession?

Lam’s pricey wafer-making equipment tends to be an easier sell in the early innings of a bull run when confidence is at a high point.

In the late stages of a market cycle, when the economy could flirt with negative growth, such equipment tends to experience a bust phase. Undoubtedly, it took many years for Lam Research to recover from the 2008 recession, given the boom and bust nature of its industry.

Indeed, the cyclicality of Lam Research has already been baked into the discounted multiple. Further, the possibility of an economic soft landing and unmet pent-up demand for chips could allow Lam to better hold its own compared to 2008. I think it will, given the unique circumstances this time around that don’t seem nearly as hostile to a firm like Lam.

I remain bullish on LRCX stock as the broader chip space looks to regain its footing.

Lam’s Managers Still Upbeat About Demand

Following the release of a tough third quarter, the management team sounded pretty confident that wafer fabrication equipment demand will hold up strong, with expectations of around $100 billion in spending for the calendar year.

Despite the growing possibility of an economic recession, the semi space doesn’t seem to be experiencing any significant dents in its armor. Many big players in the semi space — including Intel (INTC) — are not ready to trim away their capital expenditures. Intel, which has fallen behind in the chip race, cannot afford to pull the brakes on spending if it’s to close the gap or pull ahead of its fast-moving rivals.

This sheer competitiveness in the semi space could pave the way for robust demand for Lam Research’s equipment, even as economic storm clouds worsen. Still, maintaining robust demand is just half the battle. Lam Research needs to continue to navigate through ongoing supply challenges if it’s to drag its stock out of the gutter.

For the March quarter, supply-chain issues weighed on the results, paving the way for what was a disappointing quarter. Such supply woes helped spark a gross margin contraction of around 200bps. Inflationary pressures also weighed on profitability in what was already a gloomy quarter.

Looking ahead, Lam looks well-equipped to make it through what could be the last round of these supply-side headwinds. What’s on the other side of these headwinds? Long-lasting secular tailwinds could help Lam Research hold its own as the economic downturn comes and passes.

The rise of the Internet-of-Things (IoT), 5G, and cloud data centers bring forth the need for more chips. And with that, more equipment for designers to make such chips. Given the magnitude of such tailwinds, it’s arguable that the company’s expectations for $100 billion in wafer equipment spending are conservative.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, LRCX stock comes in as a Moderate Buy. Out of 20 analyst ratings, there are 13 Buy recommendations and seven Hold recommendations.

The average Lam Research price target is $642.83, implying an upside of 25.52%. Analyst price targets range from a low of $525.00 per share to a high of $840.00 per share.

The Bottom Line on Lam Research Stock

For now, I view Lam as grappling with transitory issues. The long-term fundamentals are still fully intact, and it’s hard to imagine a scenario that sees LRCX stock plunge as violently as it did during the 2008 recession.

This time around, demand for chips is solid, perhaps strong enough to weather the next economic storm. It’s possible that’s why there are no Sell recommendations from Wall Street, even amid the share price tumble.