Does Lam Research's $10 Billion Buyback Make Its Stock Worth Buying?

Lam Research (NASDAQ: LRCX) recently made two major announcements. First, it approved a 10-for-1 stock split, which should take place on Oct. 2. That will mark its third stock split following its 3-for-2 split in 1993 and 3-for-1 split in 2000.

Second, Lam approved a $10 billion buyback plan with no termination date. CFO Doug Bettinger said the buyback would be consistent with its "plan to return 75% to 100% of free cash flow to stockholders" through dividends and buybacks.

Lam's stock rose slightly after the news, but its stock has already rallied about 64% over the past 12 months and is only trading 3% below its all-time high. Do its upcoming stock split and fresh buyback plan make its stock worth buying?

Image source: Getty Images.

Why did investors turn bullish on Lam?

Lam Research is one of the world's largest producers of wafer fabrication equipment (WFE) for manufacturing silicon wafers. It's widely considered one of the linchpins of the semiconductor industry alongside ASML.

At first glance, Lam's growth rates seem unimpressive. In fiscal 2022 (which ended in June 2022), its revenue and EPS rose 18% and 22%, respectively. But in fiscal 2023, its revenue and EPS both increased by about 1%.

Like many other semiconductor equipment makers, Lam's growth decelerated as PC shipments declined in a post-pandemic market, the 5G upgrade cycle ended, and U.S. regulators blocked exports of higher-end chips to China. Rising interest rates, geopolitical conflicts, and other macro headwinds exacerbated that pressure.

For fiscal 2024, analysts expect its revenue and EPS to decline 15% and 13%, respectively, as that slowdown continues. But on a sequential basis, Lam's revenue and earnings started growing again over the past year as its margins expanded.

Data source: Lam Research. QOQ = Quarter-over-quarter.

For the fourth quarter, Lam expects its revenue to rise by a midpoint of less than 1% sequentially with an adjusted gross margin of 47.5% and an adjusted operating margin of 29.5%. It expects its adjusted EPS to stay nearly flat sequentially.

Lam isn't out of the woods yet, but it's seemingly reached its cyclical trough. That's why analysts expect its revenue and EPS to increase 18% and 21%, respectively, in fiscal 2025. But at 27 times forward earnings, a lot of that recovery has already been baked into its valuations. Its low forward dividend yield of 0.8% also won't impress serious income investors.

So what about Lam's stock split and $10 billion buyback?

Lam's 10-for-1 stock split might make its stock more attractive for smaller retailer investors, increase its trading volume through the options market, and make it easier for employees to participate in its stock plans. But it doesn't change its fundamentals or valuations -- it's merely slicing a single piece of the pie into ten smaller pieces.

As for the $10 billion buyback, it's more significant because it equals nearly 8% of Lam's current market capitalization of $126 billion. However, Lam isn't obligated to actually buy back all of those shares, and it didn't set an expiration date for the plan. In other words, investors simply have to trust Lam's judgment in executing opportunistic buybacks.

Yet Lam's previous buybacks were well timed. Over the past ten years, it bought back nearly a fifth of its shares as its stock rallied about 1,350%. Over the past five years, it repurchased nearly 10% of its shares as its stock rose more than 430%.

Prior to its latest $10 billion buyback authorization, Lam authorized a $5 billion buyback plan (without a termination date) in May 2022. By the end of the third quarter of fiscal 2024 (which ended on March 31), Lam had bought back $3.8 billion in shares under that plan. Therefore, we can assume that Lam will continue to actively buy back more shares every quarter.

Is Lam's stock worth buying right now?

Lam's growth will likely accelerate over the next few quarters as the semiconductor market stabilizes. Its stock isn't cheap, but its persistent buybacks should tighten up its valuations and consistently boost its EPS. The stock split could also generate more retail buzz for Lam -- even though it won't actually alter its underlying valuations.

Lam Research isn't an exciting growth play, but it will warm up again as the PC market recovers, new smartphones arrive, and the expanding AI market drives more companies to upgrade their data center chips. Its $10 billion buyback is just another sign that it has room to run -- so it's not too late to buy its high-flying stock.

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Leo Sun has positions in ASML. The Motley Fool has positions in and recommends ASML and Lam Research. The Motley Fool has a disclosure policy.