Intrinsic value of Lam Research - LRCX

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$139.98

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$139.98

 
Intrinsic value

$1,010

 
Up/down potential

+621%

 
Rating

str. buy

 
Value-price divergence* premium content

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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of LRCX stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 22.7

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  11.92
  32.00
  29.30
  26.87
  24.68
  22.71
  20.94
  19.35
  17.91
  16.62
  15.46
  14.41
  13.47
  12.63
  11.86
  11.18
  10.56
  10.00
  9.50
  9.05
  8.65
  8.28
  7.95
  7.66
  7.39
  7.15
  6.94
  6.74
  6.57
  6.41
  6.27
Revenue, $m
  5,886
  7,770
  10,046
  12,745
  15,891
  19,501
  23,585
  28,149
  33,191
  38,708
  44,693
  51,135
  58,024
  65,350
  73,103
  81,273
  89,855
  98,843
  108,236
  118,034
  128,241
  138,862
  149,908
  161,389
  173,321
  185,720
  198,605
  212,000
  225,929
  240,418
  255,496
Variable operating expenses, $m
 
  4,182
  5,367
  6,772
  8,409
  10,288
  12,414
  14,789
  17,413
  20,284
  23,399
  26,613
  30,199
  34,012
  38,046
  42,299
  46,765
  51,443
  56,332
  61,431
  66,743
  72,271
  78,020
  83,995
  90,205
  96,658
  103,365
  110,336
  117,585
  125,126
  132,974
Fixed operating expenses, $m
 
  1,692
  1,735
  1,778
  1,822
  1,868
  1,915
  1,963
  2,012
  2,062
  2,113
  2,166
  2,220
  2,276
  2,333
  2,391
  2,451
  2,512
  2,575
  2,639
  2,705
  2,773
  2,842
  2,913
  2,986
  3,061
  3,137
  3,216
  3,296
  3,379
  3,463
Total operating expenses, $m
  4,812
  5,874
  7,102
  8,550
  10,231
  12,156
  14,329
  16,752
  19,425
  22,346
  25,512
  28,779
  32,419
  36,288
  40,379
  44,690
  49,216
  53,955
  58,907
  64,070
  69,448
  75,044
  80,862
  86,908
  93,191
  99,719
  106,502
  113,552
  120,881
  128,505
  136,437
Operating income, $m
  1,074
  1,895
  2,944
  4,195
  5,660
  7,345
  9,257
  11,397
  13,766
  16,362
  19,180
  22,355
  25,605
  29,063
  32,723
  36,583
  40,639
  44,888
  49,329
  53,964
  58,792
  63,818
  69,046
  74,480
  80,129
  86,001
  92,103
  98,448
  105,047
  111,913
  119,059
EBITDA, $m
  1,365
  2,190
  3,285
  4,591
  6,118
  7,876
  9,870
  12,102
  14,573
  17,280
  20,218
  23,384
  26,773
  30,378
  34,194
  38,219
  42,447
  46,877
  51,507
  56,339
  61,373
  66,613
  72,062
  77,728
  83,617
  89,738
  96,100
  102,715
  109,594
  116,751
  124,201
Interest expense (income), $m
  59
  125
  162
  228
  306
  398
  503
  622
  754
  901
  1,062
  1,236
  1,423
  1,623
  1,837
  2,062
  2,300
  2,549
  2,811
  3,084
  3,369
  3,666
  3,975
  4,296
  4,630
  4,977
  5,338
  5,712
  6,102
  6,507
  6,929
Earnings before tax, $m
  960
  1,770
  2,783
  3,968
  5,353
  6,947
  8,754
  10,776
  13,012
  15,461
  18,119
  21,120
  24,182
  27,439
  30,887
  34,521
  38,339
  42,338
  46,519
  50,880
  55,423
  60,152
  65,071
  70,185
  75,499
  81,024
  86,766
  92,736
  98,945
  105,406
  112,131
Tax expense, $m
  46
  478
  751
  1,071
  1,445
  1,876
  2,364
  2,909
  3,513
  4,174
  4,892
  5,702
  6,529
  7,409
  8,339
  9,321
  10,352
  11,431
  12,560
  13,738
  14,964
  16,241
  17,569
  18,950
  20,385
  21,876
  23,427
  25,039
  26,715
  28,460
  30,275
Net income, $m
  914
  1,292
  2,031
  2,896
  3,908
  5,071
  6,390
  7,866
  9,499
  11,286
  13,227
  15,417
  17,653
  20,031
  22,547
  25,200
  27,988
  30,907
  33,959
  37,142
  40,459
  43,911
  47,502
  51,235
  55,115
  59,147
  63,339
  67,697
  72,230
  76,946
  81,856

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  6,828
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  12,264
  7,174
  9,276
  11,769
  14,673
  18,006
  21,778
  25,991
  30,647
  35,742
  41,267
  47,216
  53,577
  60,342
  67,500
  75,044
  82,968
  91,268
  99,941
  108,988
  118,413
  128,220
  138,419
  149,021
  160,038
  171,486
  183,385
  195,753
  208,614
  221,992
  235,915
Adjusted assets (=assets-cash), $m
  5,436
  7,174
  9,276
  11,769
  14,673
  18,006
  21,778
  25,991
  30,647
  35,742
  41,267
  47,216
  53,577
  60,342
  67,500
  75,044
  82,968
  91,268
  99,941
  108,988
  118,413
  128,220
  138,419
  149,021
  160,038
  171,486
  183,385
  195,753
  208,614
  221,992
  235,915
Revenue / Adjusted assets
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
Average production assets, $m
  957
  1,266
  1,637
  2,077
  2,590
  3,179
  3,844
  4,588
  5,410
  6,309
  7,285
  8,335
  9,458
  10,652
  11,916
  13,248
  14,646
  16,111
  17,642
  19,240
  20,903
  22,635
  24,435
  26,306
  28,251
  30,272
  32,373
  34,556
  36,826
  39,188
  41,646
Working capital, $m
  6,795
  1,204
  1,557
  1,976
  2,463
  3,023
  3,656
  4,363
  5,145
  6,000
  6,927
  7,926
  8,994
  10,129
  11,331
  12,597
  13,927
  15,321
  16,777
  18,295
  19,877
  21,524
  23,236
  25,015
  26,865
  28,787
  30,784
  32,860
  35,019
  37,265
  39,602
Total debt, $m
  4,533
  4,621
  6,512
  8,756
  11,370
  14,370
  17,764
  21,556
  25,747
  30,332
  35,305
  40,658
  46,384
  52,472
  58,914
  65,704
  72,836
  80,305
  88,111
  96,253
  104,735
  113,562
  122,741
  132,283
  142,198
  152,502
  163,210
  174,342
  185,917
  197,957
  210,488
Total liabilities, $m
  6,370
  6,457
  8,348
  10,592
  13,206
  16,206
  19,600
  23,392
  27,583
  32,168
  37,141
  42,494
  48,220
  54,308
  60,750
  67,540
  74,672
  82,141
  89,947
  98,089
  106,571
  115,398
  124,577
  134,119
  144,034
  154,338
  165,046
  176,178
  187,753
  199,793
  212,324
Total equity, $m
  5,895
  717
  928
  1,177
  1,467
  1,801
  2,178
  2,599
  3,065
  3,574
  4,127
  4,722
  5,358
  6,034
  6,750
  7,504
  8,297
  9,127
  9,994
  10,899
  11,841
  12,822
  13,842
  14,902
  16,004
  17,149
  18,338
  19,575
  20,861
  22,199
  23,592
Total liabilities and equity, $m
  12,265
  7,174
  9,276
  11,769
  14,673
  18,007
  21,778
  25,991
  30,648
  35,742
  41,268
  47,216
  53,578
  60,342
  67,500
  75,044
  82,969
  91,268
  99,941
  108,988
  118,412
  128,220
  138,419
  149,021
  160,038
  171,487
  183,384
  195,753
  208,614
  221,992
  235,916
Debt-to-equity ratio
  0.769
  6.440
  7.020
  7.440
  7.750
  7.980
  8.160
  8.290
  8.400
  8.490
  8.560
  8.610
  8.660
  8.700
  8.730
  8.760
  8.780
  8.800
  8.820
  8.830
  8.840
  8.860
  8.870
  8.880
  8.890
  8.890
  8.900
  8.910
  8.910
  8.920
  8.920
Adjusted equity ratio
  -0.172
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  914
  1,292
  2,031
  2,896
  3,908
  5,071
  6,390
  7,866
  9,499
  11,286
  13,227
  15,417
  17,653
  20,031
  22,547
  25,200
  27,988
  30,907
  33,959
  37,142
  40,459
  43,911
  47,502
  51,235
  55,115
  59,147
  63,339
  67,697
  72,230
  76,946
  81,856
Depreciation, amort., depletion, $m
  291
  295
  341
  395
  458
  531
  613
  705
  807
  918
  1,038
  1,029
  1,168
  1,315
  1,471
  1,635
  1,808
  1,989
  2,178
  2,375
  2,581
  2,794
  3,017
  3,248
  3,488
  3,737
  3,997
  4,266
  4,546
  4,838
  5,141
Funds from operations, $m
  1,298
  1,587
  2,372
  3,291
  4,366
  5,602
  7,004
  8,571
  10,305
  12,204
  14,265
  16,446
  18,820
  21,346
  24,018
  26,836
  29,796
  32,896
  36,137
  39,517
  43,040
  46,706
  50,519
  54,482
  58,602
  62,885
  67,336
  71,964
  76,777
  81,784
  86,997
Change in working capital, $m
  -52
  292
  353
  418
  488
  559
  633
  707
  782
  855
  928
  999
  1,068
  1,136
  1,202
  1,266
  1,330
  1,393
  1,456
  1,519
  1,582
  1,646
  1,712
  1,780
  1,849
  1,922
  1,997
  2,076
  2,159
  2,246
  2,337
Cash from operations, $m
  1,350
  903
  2,019
  2,873
  3,879
  5,043
  6,371
  7,864
  9,524
  11,349
  13,337
  15,448
  17,753
  20,210
  22,817
  25,570
  28,466
  31,503
  34,681
  37,999
  41,458
  45,059
  48,806
  52,703
  56,753
  60,963
  65,338
  69,887
  74,618
  79,539
  84,660
Maintenance CAPEX, $m
  0
  -118
  -156
  -202
  -256
  -320
  -392
  -475
  -566
  -668
  -779
  -899
  -1,029
  -1,168
  -1,315
  -1,471
  -1,635
  -1,808
  -1,989
  -2,178
  -2,375
  -2,581
  -2,794
  -3,017
  -3,248
  -3,488
  -3,737
  -3,997
  -4,266
  -4,546
  -4,838
New CAPEX, $m
  -175
  -309
  -371
  -440
  -513
  -588
  -666
  -744
  -822
  -899
  -975
  -1,050
  -1,123
  -1,194
  -1,264
  -1,332
  -1,399
  -1,465
  -1,531
  -1,597
  -1,664
  -1,731
  -1,800
  -1,871
  -1,945
  -2,021
  -2,100
  -2,183
  -2,270
  -2,362
  -2,458
Cash from investing activities, $m
  592
  -427
  -527
  -642
  -769
  -908
  -1,058
  -1,219
  -1,388
  -1,567
  -1,754
  -1,949
  -2,152
  -2,362
  -2,579
  -2,803
  -3,034
  -3,273
  -3,520
  -3,775
  -4,039
  -4,312
  -4,594
  -4,888
  -5,193
  -5,509
  -5,837
  -6,180
  -6,536
  -6,908
  -7,296
Free cash flow, $m
  1,942
  475
  1,492
  2,231
  3,109
  4,135
  5,312
  6,646
  8,135
  9,782
  11,583
  13,498
  15,601
  17,848
  20,238
  22,767
  25,431
  28,230
  31,161
  34,224
  37,419
  40,747
  44,212
  47,815
  51,560
  55,454
  59,501
  63,707
  68,081
  72,631
  77,364
Issuance/(repayment) of debt, $m
  1,887
  1,036
  1,892
  2,243
  2,614
  3,000
  3,394
  3,792
  4,190
  4,585
  4,973
  5,354
  5,725
  6,088
  6,443
  6,790
  7,132
  7,470
  7,806
  8,142
  8,482
  8,827
  9,179
  9,541
  9,915
  10,304
  10,708
  11,132
  11,575
  12,041
  12,531
Issuance/(repurchase) of shares, $m
  -155
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  1,786
  1,036
  1,892
  2,243
  2,614
  3,000
  3,394
  3,792
  4,190
  4,585
  4,973
  5,354
  5,725
  6,088
  6,443
  6,790
  7,132
  7,470
  7,806
  8,142
  8,482
  8,827
  9,179
  9,541
  9,915
  10,304
  10,708
  11,132
  11,575
  12,041
  12,531
Total cash flow (excl. dividends), $m
  3,728
  1,511
  3,384
  4,474
  5,724
  7,134
  8,706
  10,438
  12,326
  14,367
  16,556
  18,852
  21,326
  23,936
  26,681
  29,557
  32,563
  35,699
  38,966
  42,366
  45,901
  49,574
  53,391
  57,356
  61,476
  65,758
  70,209
  74,839
  79,656
  84,671
  89,895
Retained Cash Flow (-), $m
  -792
  -702
  -210
  -249
  -290
  -333
  -377
  -421
  -466
  -509
  -553
  -595
  -636
  -676
  -716
  -754
  -792
  -830
  -867
  -905
  -942
  -981
  -1,020
  -1,060
  -1,102
  -1,145
  -1,190
  -1,237
  -1,286
  -1,338
  -1,392
Prev. year cash balance distribution, $m
 
  5,880
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  6,688
  3,173
  4,225
  5,433
  6,801
  8,329
  10,016
  11,860
  13,857
  16,003
  18,257
  20,690
  23,260
  25,965
  28,802
  31,770
  34,869
  38,099
  41,461
  44,958
  48,593
  52,371
  56,296
  60,374
  64,613
  69,019
  73,602
  78,370
  83,333
  88,502
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  6,413
  2,905
  3,677
  4,474
  5,272
  6,045
  6,767
  7,413
  7,960
  8,390
  8,670
  8,829
  8,844
  8,717
  8,456
  8,074
  7,587
  7,016
  6,384
  5,713
  5,026
  4,345
  3,690
  3,075
  2,514
  2,014
  1,580
  1,212
  910
  666
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Lam Research Corporation designs, manufactures, markets, refurbishes, and services semiconductor processing systems used in the fabrication of integrated circuits. It provides thin film deposition products, including SABRE electrochemical deposition products for copper damascene manufacturing; ALTUS systems to deposit conformal atomic layer films for tungsten metallization applications; VECTOR plasma-enhanced chemical vapor deposition (CVD) and atomic layer deposition systems to deposit oxides, nitrides, carbides, multiple patterning films, anti-reflective layers, multi-layer stack films, and diffusion barriers; SPEED high-density plasma CVD products for applications in shallow trench isolation, pre-metal dielectrics, inter-layer dielectrics, inter-metal dielectrics, and passivation layers; and SOLA ultraviolet thermal processing products for the treatment of back-end-of-line low-k dielectric films and front-end-of-line silicon nitride strained films. The company also offers plasma etch products, such as Kiyo products that provide solutions for conductor etch applications; Flex products, which offer technologies and application-focused capabilities for dielectric etch applications; and Syndion products that provide solutions to address various through-silicon via etch applications. In addition, it provides single-wafer clean products, including EOS, Da Vinci, DV-Prime, and SP series products for wet etch and clean applications in wafer-level packaging, including silicon substrate thinning, wafer stress relief, underbump metallization etch, and photoresist removal; and Coronus plasma-based bevel clean products to enhance die yield by removing particles, residues, and unwanted films from the wafer’s edge, as well as legacy products. The company offers its products in the United States, Europe, Taiwan, Korea, Japan, China, and Southeast Asia. Lam Research Corporation was founded in 1980 and is headquartered in Fremont, California.

FINANCIAL RATIOS  of  Lam Research (LRCX)

Valuation Ratios
P/E Ratio 24.5
Price to Sales 3.8
Price to Book 3.8
Price to Tangible Book
Price to Cash Flow 16.6
Price to Free Cash Flow 19.1
Growth Rates
Sales Growth Rate 11.9%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -11.6%
Cap. Spend. - 3 Yr. Gr. Rate 1.7%
Financial Strength
Quick Ratio 7
Current Ratio 0
LT Debt to Equity 60.8%
Total Debt to Equity 76.9%
Interest Coverage 17
Management Effectiveness
Return On Assets 9%
Ret/ On Assets - 3 Yr. Avg. 8.5%
Return On Total Capital 10.1%
Ret/ On T. Cap. - 3 Yr. Avg. 9.8%
Return On Equity 16.6%
Return On Equity - 3 Yr. Avg. 14.3%
Asset Turnover 0.5
Profitability Ratios
Gross Margin 44.5%
Gross Margin - 3 Yr. Avg. 43.8%
EBITDA Margin 22.3%
EBITDA Margin - 3 Yr. Avg. 21.6%
Operating Margin 18.2%
Oper. Margin - 3 Yr. Avg. 16%
Pre-Tax Margin 16.3%
Pre-Tax Margin - 3 Yr. Avg. 15.4%
Net Profit Margin 15.5%
Net Profit Margin - 3 Yr. Avg. 13.9%
Effective Tax Rate 4.8%
Eff/ Tax Rate - 3 Yr. Avg. 9.6%
Payout Ratio 20.8%

LRCX stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the LRCX stock intrinsic value calculation we used $5886 million for the last fiscal year's total revenue generated by Lam Research. The default revenue input number comes from 2016 income statement of Lam Research. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our LRCX stock valuation model: a) initial revenue growth rate of 32% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for LRCX is calculated based on our internal credit rating of Lam Research, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Lam Research.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of LRCX stock the variable cost ratio is equal to 54.4%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $1651 million in the base year in the intrinsic value calculation for LRCX stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Lam Research.

Corporate tax rate of 27% is the nominal tax rate for Lam Research. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the LRCX stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for LRCX are equal to 16.3%.

Life of production assets of 8.1 years is the average useful life of capital assets used in Lam Research operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for LRCX is equal to 15.5%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $5895 million for Lam Research - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 162.434 million for Lam Research is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Lam Research at the current share price and the inputted number of shares is $22.7 billion.


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Stock chart of LRCX Financial statements of LRCX
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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