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LAM – Surfing the Spending Tsunami in Semiconductors – Trailing Edge Terrific

LAM – Surfing the Spending Tsunami in Semiconductors – Trailing Edge Terrific
by Robert Maire on 08-01-2021 at 6:00 am

-$80B + in WFE with strong back half in 2021
-Trailing edge strength adds to overall great demand
-Supply side headwinds require effort- Malaysia now open
-It just comes down to execution which Lam has done well

Lam Research HQ

Nice beat and sandbagged guide
As Lam has done consistently for many quarters now, they beat numbers with Revenues of $4.15B and EPS of $8.09 versus street estimates of $4.01B and $7.55EPS. Guidance was for revenues of $4.3B +- $250M and EPS of $8.10 +- $0.50 versus street currently at $4.07B and $7.77 in EPS.

While we think this is a fine, normal, “sandbagged” , guidance range some investors in the after market took it as a sign of weakness as it was flattish off of the just reported numbers. We think its nothing more than Lam’s standard guide setup that it can easily beat.

On track for $80B+ in WFE spend for the year
It should come as no surprise to anyone following the semiconductor industry that we will se over $80B in spending on tools.

For Lam, it was also no surprise that China leads the way at 37%, followed by Korea at 30%, then Taiwan at 13%, Japan at 9% and the US a distant fifth in business at a paltry 5%.

So far, it appears that any restrictions on sales to China are having exactly zero impact on Lam’s large business there.

Its also very clear that even with the expected $52B in “Chips for America” spending by the government the US will likely remain very far behind in overall spend.

Trailing Technology Terrific
We have been suggesting that business for old tools and 8 inch wafers is very strong as much of the shortage in chip capacity is in those trailing edge fabs.

It’s not 12 inch, 7NM fabs that make chips for cars its 20 year old, 8 inch, 90NM and 65NM fabs that do the bulk of the work.

This trailing edge business is just icing on the cake of already booming leading edge technology and represents almost an annuity business as customers just buy more of what they already have in the fab with little competition and no room to negotiate.

Memory remains in pretty good balance
Memory, particularly NAND which is key for Lam at 49% of their revenues, remains in a healthy supply/demand balance with supply slightly behind demand in NAND and DRAM supply and demand in rough parity.

This all makes for a very good price environment with in turn supports continued capex in memory.

It certainly doesn’t appear that memory will get out of whack any time soon and likely not before the end of the year and beyond.

New process steps and technology helps grow capital intensity
In addition to the strong market demand trends and chip shortages we see growth on top of that due to new process steps either won, invented, or added to Lam’s offerings. The Vector “anti-stress” tool or the new dry resist tools are good examples of opportunities that did not exist a short time ago.
Lam has also done a good job of share gains in some key spaces as well.

Supply Side Stretched
As we had talked about with ASML where the supply problems are even worse, Lam has its share of getting enough parts to keep building and servicing tools.

With the thousands of parts that go into a typical tool even a simple, cheap, part can keep a tool from shipping.

This is a headwind but so far it has not impacted Lam in any negative way.

The Stock
We certainly like Lam’s positioning but the price of the stock has perfection and then some baked in. Multiples are high and so are expectations which lead to downdrafts such as we saw in the aftermarket less than happy about less than stellar guidance.

Its both tough to chase the valuation of the stock as well as tough not to own the stock. While its too early to take profit its also hard to put new money to work in an already heated valuation.

We would likely stand pat with a current position and trade around the potential ups and downs of news flow in the space. We would be very sensitive and aware of any news about the shortage situation slowing or the memory balance changing.

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