Key Highlights

● Lam Research reported record quarterly revenue of $8.22 billion.

● The Philadelphia Semiconductor Index had its biggest one-day drop since June 23.

● Lam guided December-quarter revenue to $8.6 billion, plus or minus $400 million.

● The chip index is still up by about half for the year.

Lam Research (NASDAQ:LRCX) reported record results on Wednesday evening, but its outlook helped set off a rout in chip stocks on Thursday, October 22. Lam shares plunged to about $230.15, among the worst performers in the S&P 500, and the Philadelphia Semiconductor Index posted its biggest one-day drop since June 23.

The selling spread across the industry, from equipment makers to chip designers, and helped drive the Nasdaq Composite down 694 points to 26,008.86.

What Lam said

The quarter itself was strong. Revenue was a record $8.22 billion, and non-GAAP earnings of $2.20 a share beat expectations, with record margins.

The problem was the guidance. Lam forecast December-quarter revenue of $8.6 billion, plus or minus $400 million, with a midpoint slightly below what many investors had hoped for. It projected earnings of $2.33 a share, plus or minus 15 cents. China, which made up more than a third of September-quarter sales, was guided "meaningfully down."

Lam cited supply constraints. CFO Doug Bettinger said revenue would have been higher without "near-term supply chain constraints that we are actively managing," and warned that "things are going to continue to be constrained."

CEO Tim Archer said clean-room and component constraints will "limit chip makers and equipment companies' ability to fully meet end demand" into 2027. He also sought to reassure: "this is nothing like that… I think we'll be caught up very shortly."

The avalanche

Investors read Lam's warning as a signal for the entire supply chain. KLA (NASDAQ:KLAC) and Applied Materials (NASDAQ:AMAT) tumbled, with Applied trading at $375.58. ASML (NASDAQ:ASML) slid to $1,560.54, and Teradyne (NASDAQ:TER) dropped $36.74 to $308.75.

Chip designers fell too. Advanced Micro Devices (NASDAQ:AMD), Intel (NASDAQ:INTC), Sandisk (NASDAQ:SNDK) and Marvell Technology (NASDAQ:MRVL) all sank by large amounts. Micron Technology (NASDAQ:MU) fell below $900. Smaller names were hit even harder, with FormFactor (NASDAQ:FORM), MACOM and Cohu (NASDAQ:COHU) plunging.

Nvidia (NASDAQ:NVDA) was trading at $212.21 and was the single biggest drag on the S&P 500. Its CEO Jensen Huang added to the pressure by saying "The demand of the capital is much greater than the availability of the capital."

Brokerages trimmed expectations. One cut its Lam price target to $290 from $390, and another cut its target to $339.

Context for the selloff

The chip index is still up by about half for the year, but now sits more than a quarter below its June 22 record. It closed just above its 200-day moving average.

Lam's warning compounded worries from Meta Platforms (NASDAQ:META), which reported negative free cash flow and heavy spending plans. "The dominant market dynamic in recent weeks has been the unwinding of AI-related positions by hedge funds," one bank strategist said.

The rest of the market fared better. About two of every three S&P 500 stocks rose, according to market data, and the Dow Jones Industrial Average edged up 11.89 points to 52,867.98.

Teradyne and Intel Report Next for Chips

Teradyne reports on October 27, and Intel on October 29, offering more reads on chip demand. Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) report on October 28, the same day as the Federal Reserve decision, and their spending plans will matter for equipment makers. Investors will also watch whether the chip index holds above its 200-day moving average.