LRCX- Mediocre, flattish, long, U shaped bottom- No recovery in sight yet-2025?

– Lam reports another flat quarter & guide- No recovery in sight yet
– Seems like no expectation of recovery until 2025- Mixed results
– DRAM good- NAND weak- Foundry/Logic mixed-Mature weakening
– Clearly disappointing to investors & stock hoping for a chip recovery

Another Flat Quarter & Guide

Lam’s report was uninspiring in that last quarter was $3.76B, the current quarter was $3.8B and guide is for $3.8B….flat, flat and more flat…the long flat bottom of a “U” shaped down cycle.

Revenue came in at $3.79B with EPS of $7.79 guidance is for $3.8B+-$300M and EPS of $7.50+- $0.75.

We are clearly bouncing along a more or less flat bottom of a normal semiconductor down cycle.

DRAM is better with HBM being the obvious bright spot. We would remind investors, again and agin , that HBM is only about 5% of the market, so even if its on fire its still not a lot.

Foundry/Logic is clearly mixed with more mature nodes slowing considerably.

NAND remains weak with hopes for a 2025 recovery as excess capacity gets used up.

China bumps up to 42% from 40%

China remains the biggest spender in the industry at 42% of Lam’s business versus only 6% for the US. China is outspending the US in Semiconductor equipment by a ratio of 7 to 1 (at least at Lam).

This remains a significant exposure for Lam and others if the US ever gets around to being serious about slowing China’s rapid progress in the semiconductor industry. At this point its likely way to late as China will have 5NM in the not too distant future thanks to US equipment companies enablement and the commerce departments lack of action.

Management is acting like no recovery in sight until maybe 2025

Management quoted on the call saying that things were setting up for a better 2025 which we think is code for “don’t expect a recovery anytime in 2024”.

Headcount was flat at 17,200 and if management felt a recovery was on the way we would expect an uptick rather than flat. Finally, management made comments about managing spend.

Overall, we did not get a positive tone from management on the call both in their comments as well as questions answered during Q&A. Overall a mediocre call at best and uninspiring.

ASML & Litho always precedes the rest of the industry

We would point out that litho orders always happen early in an up cycle given the long lead times. Deposition and etch tend to be more of a turns business with shorter lead times versus litho tools which can have lead times well over a year especially in EUV.

Thus its going to be impossible to see a recovery in Lam and AMAT until we get the prerequisite bounce in litho tool orders

Not a lot of new markets – Dry resist likely seeing “resistance”

Lam has not had huge success in breaking out of its traditional deposition and etch markets that it has been in since the Lam – Novellus merger in 2012.

Lam is trying to branch out into litho related markets by entering the dry resist market.

From what we have heard, this has been relatively slow going in large part due to cost/throughput issues. Rumors we have heard from customers point to a very high tool cost coupled with an ultra slow throughput winding up with a cost per wafer processed that rivals EUV costs or more.

In our view this will severely limit the ultimate market size as current spin on resist is dirt cheap by comparison and fine for the vast majority of applications.

Lam likely needs to find some other new markets either organically or through acquisition to get growth.

The Stocks

We have been saying for a while here that the semiconductor equipment stocks had gotten way ahead of themselves and the recent pullback seems to underscore our belief.

It should come as almost no surprise that Lam shares traded down in the after market as its clear that investors had been hoping for and pricing in a recovery that clearly isn’t coming any time soon.

Meanwhile we still have significant exposure to all the China sales.

Strength in HBM is a small percentage and doesn’t offset the broader weakness in NAND. The weakness in mature foundry/logic means that a key driver has run its course.

AI is obviously fantastic, but it too is a very small percentage of the overall chip market and only at the bleeding edge. TSMC has the lock on the leading edge AI market and we don’t see them running out and throwing money at equipment companies as we see quite the opposite in their more negative outlook.

Investors need to dissuade themselves of the inference that AI and HBM will be a boon to the chip industry. It will be great but the majority of the industry remains weak and in a funk that will take a while to recover from as this has been one of the deeper down cycles in our long experience.

We clearly expect some weakness out of Lam shares and don’t expect glowing reports from KLAC or AMAT and would expect weakness in their share price in sympathy.

Overall, we remain with our view that this is a long slow recovery hampered by macro issues as well as industry sp[ecific issues such as oversupply.

The CHIPS Act is also not coming to the rescue any time soon as you need to build the fabs before you buy the equipment so the trickle down from the CHIPS Act to the equipment makers is well over a year or two away.

Remain hunkered down……

About Semiconductor Advisors LLC

Semiconductor Advisors is an RIA (a Registered Investment Advisor),
specializing in technology companies with particular emphasis on semiconductor and semiconductor equipment companies. We have been covering the space longer and been involved with more transactions than any other financial professional in the space. We provide research, consulting and advisory services on strategic and financial matters to both industry participants as well as investors. We offer expert, intelligent, balanced research and advice. Our opinions are very direct and honest and offer an unbiased view as compared to other sources.

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