Lam Research's Revenue Streak Masks Deepening China and Valuation Risks

What happened

Lam Research reported a 22% revenue surge to $5.34 billion in Q2 FY26, extending its streak above $5 billion for three quarters, driven by strong foundry equipment demand. However, SEC filings reveal that China revenue mix increased to 39% in 1H FY26, heightening exposure to export controls that management states have already materially impacted trade. Deferred revenue declined to $2.25 billion from $2.7 billion at FY25 year-end, signaling weaker customer down payments and potential demand timing issues. Gross margin dipped to 49.6% in the Dec-25 quarter due to unfavorable mix, underscoring sensitivity to rapid demand changes that management warns can pressure earnings. Despite the top-line strength, the stock trades at 47.7x P/E, embedding optimistic assumptions about sustained growth amidst these escalating risks.

Implication

Lam's revenue growth, while impressive, relies heavily on foundry capex and a rising China mix that faces $600M in quantified export-control headwinds, increasing geopolitical risk. The drop in deferred revenue points to weakening order visibility, which could impair future earnings if not reversed. Margin compression from mix shifts highlights operational fragility, contradicting narratives of flawless execution. Current valuations at 47.7x P/E assume a prolonged upcycle and stable margins, but any China policy tightening or demand slowdown could trigger multiple contraction. Therefore, adhering to a WAIT rating and seeking entry near $200 offers better risk-adjusted returns than chasing the current premium.

Thesis delta

The new article confirms Lam's revenue strength but does not alter the core investment thesis from the DeepValue report. Key risks—including China concentration at 39% of revenue, falling deferred revenue, and high valuation—remain unchanged and critical. Investors should continue waiting for either a valuation reset to $200 or clearer evidence of structural de-risking before considering a position.