Lam Research Posts Record 40% Operating Margin, Yet Stock Sells Off

What happened

Lam Research reported its first-ever 40% operating margin in the September 2026 quarter, underscoring exceptional operational execution in the AI-driven wafer fab equipment upcycle, yet shares fell nearly 8% after hours because the market had already priced in perfection at a valuation above $430 (P/E ~81x, EV/EBITDA ~85x). The selloff echoes the DeepValue master report’s warning that the stock lacked margin of safety at pre-earnings levels, with China still representing a third of revenue and ongoing export-licensing uncertainty. While the record margin validates the company’s ability to convert revenue growth into profitability, the market’s reaction suggests investors were looking for even stronger guidance or a resolution to China risk, not just another beat. This outcome aligns with the master report’s base case of sustained revenue around $6.6B with operating margin in the high-30s, but the price drop moves the stock closer to the report’s attractive entry of $360, though still above it. Overall, the quarter reinforces Lam’s operational strength but leaves the investment thesis unchanged: a WAIT pending either a cheaper price or clear evidence that China exposure stabilizes and growth broadens beyond DRAM.

Implication

For investors, the record operating margin is a testament to Lam's execution and the strength of AI-driven equipment demand, but the market's negative reaction indicates that the stock was priced for flawless results and a benign geopolitical backdrop. The selloff brings the price closer to the master report's attractive entry of $360, but it may still be above that level, so patience is warranted. Key watchpoints include next quarter's revenue guidance (whether it sustains $6.6B or higher), the China revenue share (if it falls below 30% with explicit licensing attribution, the bear case strengthens), and any concrete monetization metrics for Equipment Intelligence. If the stock falls further toward $360 without a fundamental deterioration, it would offer a better risk/reward for long-term investors, but near-term volatility driven by AI-spending concerns could persist. Maintaining a WAIT stance is prudent until either valuation resets or the China overhang lifts.

Thesis delta

The record 40% operating margin confirms Lam's ability to extract profitability from the current upcycle, but the post-earnings selloff underscores that the market's expectations were already elevated and that China risk remains a hangover. The thesis shifts slightly in that the price drop improves the potential entry point, but it does not yet reach the attractive entry of $360, so the WAIT rating stands. We continue to require either a lower price or clearer evidence that China revenue share holds and growth broadens before turning constructive.