Lam Research (LRCX, Financial), the provider of wafer fabrication equipment (WFE) for the semiconductor industry, posted strong second quarter results yesterday, with double-digit revenue and earnings growth.
Revenue grew about 34% during the quarter to reach $3.13 billion; analysts’ estimates fell short by $70 million. The WFE manufacturer posted earnings per share of $5.31 during the quarter, beating the Street’s guidance by 37 cents.
Forward guidance came in a bit weaker as the company provided a downward revision for the third fiscal quarter of 2018. Lam Research is guiding for midpoint revenue of $2.3 billion against the consensus of $2.7 billion. Similarly, earnings per share are expected to reach $3.20 during the third quarter of 2018, below the Street’s expectations of $3.90. The market’s reaction was mixed as the stock lost 3% in afterhours Thursday, only to recover later and post gains in excess of 4.5%.
Lam Research is a technology company that builds and sells wafer fabrication equipment machinery to semiconductor manufacturers including memory manufacturers, semiconductor foundries and integrated device manufacturers like Samsung (SSNLF, Financial), Taiwan Semiconductors (TSM, Financial), SK Hynix and Micron Technology (MU, Financial). Products of Lam Research are used in front-end wafer processing of semiconductor manufacturing and also enable back-end wafer level packaging.
Revenue insights
The California-based semiconductor equipment supplier generated most of its revenue from selling equipment to memory players during the second quarter of 2018. Non-volatile memory (NVM) – which includes sales to secondary storage players – contributed more than 50% towards the revenue of the company during the quarter. DRAM-related sales to the likes of Micron and SK Hynix brought in 25% of the company’s revenue.
Why the weak guidance?
Guidance is the main talking point from Lam’s earnings report yesterday evening. The downward revision was ignited by the weakness in WFE spend by semiconductor companies in the near term.
“Well-published at this point, customer equipment investment spending has softened near term as industry participants continue to strive for discipline and sustainability in their businesses,” said Martin Brian Anstice, the CEO of Lam Research, on an earnings call yesterday.
Gartner also forecasted a slowdown in 2018 WFE spending, which might be at play here. The research firm forecasted that wafer equipment spending will remain flat during 2018.
What’s the outlook?
Regardless, Lam is expected to perform well in the long term due to increasing need for data storage, memory and complex chip designs. The management said that the September quarter will be the low point and growth will take off from there.
Looking at the industry trends, the management’s statements make sense. First, the memory market is booming, thanks to the proliferation of connected devices and cloud computing. Second, the race for miniaturization of chips is keeping foundries on their toes to invest in fabrication equipment. As Lam generates more than 90% of its revenue from memory and foundries, the rise in capital expenditures will help the company grow further in upcoming years.
However, the top line might remain under pressure in the short term. Taiwan Semiconductor recently cut its capex spending guidance for the full year 2018. As Taiwan Semiconductor is among the customers of Lam Research, revenue is expected to remain sluggish. Moreover, Gartner expects WFE spending will decline 7.3% during 2019 before returning to growth in 2020. All in all, Lam is facing growth headwinds in the short term.
What’s the thesis?
Lam remains a buy despite the fears of declining short-term growth. First, the stock trades at a forward price-earnings ratio of merely 10. EVA valuation also reveals an upside of more than 15% with a growth assumption of just 3%. Analysts, on the other hand, expect Lam’s earnings to grow an astonishing 22% during the next five years.
Second, Lam Research is exposed to the long-term growth benefit of the industry, fueled by increasing need for data centers, memory and complex semiconductor products. In short, Lam Research fits the bill of a decent value stock.
Takeaways
- Lam Research witnessed double-digit growth during the quarter, which is indicative of healthy WFE spend in the industry.
- The potential decline in semiconductor capex during the next year might put pressure on Lam’s top line in the short term.
- Nonetheless, the long-term thesis is intact amid the prevailing data center culture and the need for storage combined with a cheap valuation.
Disclosure: I have no positions in any stocks mentioned and have no plans to initiate any positions within the next 72 hours.
