Yahoo Finance Is Lam Research Corporation’s (NASDAQ:LRCX) PE Ratio A Signal To Buy For Investors?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
Lam Research Corporation (NASDAQ:LRCX) trades with a trailing P/E of 10.6x, which is lower than the industry average of 21.2x. While LRCX might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
Check out our latest analysis for Lam Research
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for LRCX
Price-Earnings Ratio = Price per share ÷ Earnings per share
LRCX Price-Earnings Ratio = $155.68 ÷ $14.728 = 10.6x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to LRCX, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since LRCX’s P/E of 10.6 is lower than its industry peers (21.2), it means that investors are paying less for each dollar of LRCX’s earnings. This multiple is a median of profitable companies of 24 Semiconductor companies in US including ARISE Technologies, PV Crystalox Solar and Daqo New Energy. One could put it like this: the market is pricing LRCX as if it is a weaker company than the average company in its industry.
Assumptions to watch out for
However, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to LRCX. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with LRCX, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing LRCX to are fairly valued by the market. If this does not hold true, LRCX’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to LRCX. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for LRCX’s future growth? Take a look at our free research report of analyst consensus for LRCX’s outlook.
Past Track Record: Has LRCX been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of LRCX’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
