Lam Research's High P/E Debate: AI Growth Optimism Clashes with Valuation and Geopolitical Risks

What happened

LRCX's stock has rallied 175% to a forward P/E of 38.14, as highlighted in a recent Zacks article that cites AI-driven demand, strong margins, and quarterly revenues exceeding $5 billion as justification for the premium. However, the DeepValue master report reveals a trailing P/E of 46.65x and argues that the current price of $230.10 already discounts sustained high margins and WFE growth, with limited upside over the next 6-18 months. The report identifies critical vulnerabilities, including China exposure at 35-40% of revenue and export control risks that could materially impact sales, alongside aggressive capital returns reducing balance-sheet cushion. Market sentiment is crowded with an 'AI champion' narrative, but early stress signals include cleanroom constraints gating WFE growth and China revenue dependency. While the article portrays confidence in growth, the report maintains a 'WAIT' rating, advising investors to seek a pullback to $190 or clearer evidence that WFE and margin trajectories will outperform assumptions.

Implication

The elevated P/E reflects robust AI and HBM tailwinds, but it embeds optimistic assumptions about WFE reaching ~$135B and margins holding near 50%, leaving the stock vulnerable to any guidance miss. China's revenue share and export control uncertainties present a direct threat to earnings, with a potential $300M annual impact flagged as a thesis breaker, necessitating close monitoring of geopolitical developments. Aggressive shareholder returns have depleted excess liquidity, reducing financial flexibility if demand softens, while deferred revenue declines signal weaker near-term visibility. In the near term, the stock is highly sensitive to quarterly WFE updates and China-related news, with downside risks outweighing upside in a balanced scenario analysis. Long-term investors should await a more attractive entry near $190 or confirmation that margins and China exposure are stabilizing, as current prices offer poor risk-reward without a fundamental improvement in risk factors.

Thesis delta

The new article reinforces the growth narrative around AI-driven demand but does not alter the core DeepValue thesis, which remains that LRCX is overvalued given its China risks and high multiples. No shift is warranted; the thesis still calls for waiting on a pullback or clearer evidence that WFE growth and margins will sustainably exceed current market expectations.