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Coronavirus Remains Good for Semiconductors but not China

Coronavirus Remains Good for Semiconductors but not China
by Robert Maire on 10-24-2020 at 6:00 am

COVID Semiconductors china

  • LCRX puts up a solid QTR and slightly soft guidance
  • China Concerns weigh on future but COVID remains driver
  • Memory spend could be better & help offset China
Solid September Quarter

Lam reported Non GAAP EPS of $5.67 versus $5.19 street and Revenues of $3.18B which was $70M better than street expectations. Lam obviously does a very good job of “managing” street expectations as they always come in above estimates as far back as we can remember. In addition there haven’t been any major surprises in execution that has impacted financials.

Managing and smoothing what has always been a cyclical volatile business has helped overall financial valuation of the company.

Guidance was also very solid at $5.60 +- $0.40 EPS Non GAAP and revenues of $3.3B +- $200M. Guidance is lower than what it would have otherwise been had Lam been able to ship to SMIC. Our view is the impact is relatively minimal as it is only SMIC (for now) and we are sure SMIC was stocking up on tools ahead of time.

Applying for a Chinese SMIC License that will never come

Management mentioned on the call that shipments to SMIC have obviously stopped but they are applying for licenses. The words from management sounded not very hopeful that licenses would be granted by the US government.

We agree and think we can discount future business from SMIC for the foreseeable future. If it ever does come back in the future it will certainly be at lower levels.

The bigger question is does the Chinese embargo spread?

At 37% of business, China is far and away Lam’s biggest customer. Korea is a distant second at 24%. Taiwan (mainly TSMC) is 14%. The US, which is Intel and Micron is a tiny 4% of business.

In our view there is likely a better than 50/50 chance of the China embargo spreading. If not by actions of the US government, then by actions of the Chinese government who may want to put US semiconductor equipment entities on the “unreliable entity” list.

This is obviously an opportunity for companies like Tokyo Electron to take share in China or Chinese homegrown equipment companies like AMEC to take even more share.

We have seen real history of this as Veeco’s China business went from huge to zero as China native AMEC took 100% of their business away in MOCVD tools, which was a near death experience for Veeco.

Even if the embargo doesn’t spread, China business will slow

Even if the US and Chinese governments don’t elevate the tit for tat trade war, we think there will still be a loss of business as China looks elsewhere for more reliable suppliers than US suppliers.

Our sources in China say there is a huge push to get away from US suppliers even though they may not be a lot of alternatives.

COVID remains good for Chips

The move to remote learning and remote business is likely a permanent structural change that isn’t going fully back to whatever it once was.

Long term chip demand trends remain good but we still remain concerned about the final trickle down of global macro economic slow down finally hitting the technology sector and more specifically semiconductors.

We also remain cautious about Chinese customers stocking up on both tools and chips in advance of further trade issues.

Service breaks a billion dollars

Service, which is of increasing importance to all equipment companies, hit a substantial milestone of more than $1B in business in a quarter.

Service will continue to smooth the natural lumpiness of the tool business and being 30% or so increases the ability to smooth out the lumpy side of the business.

The stocks

Given that the stock has been at all time highs and priced to perfection, there could be some weakness on the cloudy China outlook that may scare some investors (for good reason).

Its certainly not unexpected but the potential impact can’t be ignored as it is more than a third of business. While COVID has been a large secular positive driver we still are concerned about the longer term negatives.

We see little to no collateral impact on KLA or Applied Materials or sub suppliers to Lam other than some weakness due to China. The financials are near perfect and execution remains very strong so Lam remains a very strong house in a less certain, but still growing neighborhood.


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