18 Oct 2021
Ahead Of Lam Research Quarterly Earnings, 3 Ways To Trade The Stock
3 Lam Research Stock Trades For Long-Term Portfolios
LRCX stock is up more than 19% so far in 2021, and saw a record high in June.
Chip-equipment maker will issue quarterly metrics on Oct. 20.
Despite potential short-term volatility in Lam Research stock, buy-and-hold investors could regard any further short-term decline as an opportune entry point.
Investors in the semiconductor manufacturing equipment vendor Lam Research (NASDAQ:LRCX) have seen their shares go up by 19.5% so far this year. In fact, the stock hit an all-time high of $673.80 on June 1. By comparison the Philadelphia Semiconductor Index has returned 18.5%.
On Oct. 15, LRCX shares closed at $564.47. In other words, since the stock's record high over four months ago, the shares have lost about 16%. The 52-week range for the stock has been $333.31 (October 2020) - $673.80 (June 2021), while the company’s market capitalization stands at $79.5 billion.
Recent metrics highlight: “The global semiconductor manufacturing equipment market is estimated to be USD 62.4 billion in 2020 and projected to reach USD 95.9 billion by 2025; at a CAGR of 9.0%.”
Lam Research is among the leading semiconductor manufacturing equipment suppliers. Its competitors include Applied Materials (NASDAQ:AMAT), ASML (NASDAQ:ASML), KLA (NASDAQ:KLAC), Teradyne (NASDAQ:TER) and Tokyo Electron (OTC:TOELY).
In late July, management announced robust results for the quarter ended June 27, (the “June 2021 quarter”). Revenue came at $4.5 billion, up 8% sequentially since the previous quarter. Non-GAAP net income of $1.16 billion translated into earnings of $8.09 per diluted share.
On the results, CEO Tim Archer said:
“The combination of strong semiconductor demand and rising device complexity is driving higher levels of wafer fabrication equipment investment. Our technology differentiation and deep collaboration with customers position Lam to extend our leadership across all market segments.”
Chip-equipment maker Lam is expected to release earnings next on Wednesday, Oct. 20 after the close. At that time, in addition to regular metrics, investors will want to know more about how the current chip shortage worldwide is impacting the company's top-line.
What To Expect From LRCX Stock
Among 28 analysts polled via Investing.com, Lam Research stock has an 'outperform' rating.
There's a 12-month price target of $723.25 on the stock, implying an increase of about 28% from current levels. The 12-month price range currently stands between $600 and $815.
Trailing P/E, P/S and P/B ratios for LRCX stock stand at 20.96x, 5.43x and 13.35x, respectively. We believe long-term investors could begin to find value around these levels.
Readers who watch technical charts might be interested to know that a number of Lam short- and intermediate-term oscillators are urging caution. However, the long-term uptrend is still intact.
Finally, as part of the short-term sentiment analysis, it would be important to look at the implied volatility (IV) levels for Lam Research options. This metric typically shows us the market's opinion of potential moves in a security. However, this metric does not forecast the direction of the move.
LRCX’s current implied volatility is 32.6, which is lower than the 20-day moving average of 37.8. This means implied volatility is trending lower. Although the current IV level could change, for now, the market does not seem to expect extreme choppiness in the shares.
Given the upcoming earnings release, LRCX stock could still come under further short-term pressure in the days ahead. Yet, our expectation is for Lam Research to find strong support between $500-$550 levels.
Although it might initially dip toward and even below $500, it is likely to bounce back before too long. Afterward, the shares would likely trade sideways while it establishes a new base.
3 Possible Trades On Lam Research Stock
1. Buy LRCX Stock At Current Levels
Investors who are not concerned with daily moves in price and who believe in the long-term potential of the company could consider investing in LRCX stock now.
On Oct. 15, Lam closed at $564.47. Buy-and-hold investors should expect to keep this long position for several months, if not multiple quarters, while the stock makes an attempt at the record high of $673.80. Such a move would lead to a return of almost 20% from the current level.
Then, the next step would be analysts’ price of the recent multi-year high of $723.35. Readers who opt for this approach, but are concerned about large declines, might also consider placing a stop-loss at about 3%-5% below their entry point.
2. Buy An ETF With Lam Research As A Main Holding
Many readers are familiar with the fact that we regularly cover exchange-traded funds (ETFs) that might be suitable for buy-and-hold investors. Thus, those who do not want to commit capital to LRCX stock, but would still like to have exposure to the shares, could consider researching a fund that holds the company as a top holding.
Examples of such ETFs include:
Invesco Dynamic Semiconductors ETF (NYSE:PSI): The fund is up 21.1%YTD, and LRCX stock’s weighting is 4.78%;
iShares Semiconductor ETF (NASDAQ:SOXX): This fund is up 19.8% YTD, and LRCX stock’s weighting is 3.88%;
SPDR® NYSE Technology ETF(NYSE:XNTK): The fund is up 15.7% YTD, and LRCX stock’s weighting is 2.81%;
Siren DIVCON Dividend Defender ETF(NYSE:DFND): The fund is up 4.8% YTD, and LRCX stock’s weighting is 2.17%.
3. Protective Put With An ETF
Readers who are long-term bullish on Lam Research stock but remain nervous about a short-term potential decline, especially in the chip sector, might consider buying a protective put in addition to their stock holdings.
Protective puts are usually done with the put option for the stock. However, we are fast approaching a busy reporting season for many tech names, including semiconductor companies. Therefore, investors could consider buying a put on a fund like PSI, which we have mentioned above.
On Oct. 15, PSI closed at $127.06. For instance, the trader might buy an at-the-money (ATM) put option, like the PSI Dec. 17 127-strike put option.
This option is currently offered at $4.95. It would cost the trader $495 to own this put option which expires in two months. As a result, LRCX investors who also hold shares would have some protection, especially during the earnings season, in case the chip shares decline.
However, the position would require constant monitoring and thus may not be appropriate for many readers. At expiry, this trade would break even at $122.05 (i.e., $127.00-$4.95).
In theory, a trader’s maximum gain would be $12,205 if the price of the underlying fund PSI were to go to zero. However, the probability of such a move is not high at all.
Traders would need to clearly determine their objectives before entering this trade (i.e., at what profit or loss level they would be ready to close the position if they are not holding it until expiry). If the underlying PSI closes above $127 on the day of expiry, the trader will lose all of the premium of $4.95.