LRCX – Great QTR and guide but gathering China storm

-Lam reports record QTR and great guide amid growing anxiety
-Weakness has not yet trickled down to Lam’s order book
-Company contacted by US government on new China restrictions
-Combination of supply issues/China/economy cut WFE view

Numbers are great

Lam reported revenues of $4.64B and EPS of $8.83 which represented a very strong beat. Even more importantly , guidance for September is for $4.9B +- $300M and EPS of $9.50 +- 0.75. Deferred revenue was up slightly from $2.07B to $2.2B.

These are record levels of business…..but despite these records the company cut its year WFE spending view from $100B to $90 to $95B range….obviously this is a strange contradiction, business is great, better than ever yet the company is getting more cautious on the overall yearly outlook.

The triple threat- China embargo, Down cycle & Supply Chain

The problem is that we have three relative unknowns hanging over the industry’s and Lam’s head. The supply chain continues to be a problem even though Lam appears to have done a good job in mitigating those issues. There clearly is a down cycle happening in the memory segment as reported by several chip makers in the memory market. Lam being a memory centric provider is more susceptible than other tool makers to a memory downturn. We have not seen similar signs in foundry/logic…..yet. And last, but not least in the triple threat is China….

Lam has been contacted by the US government on China embargo

Lam management said;

“we were recently notified that there was like – there was to be a broadening of the restrictions of technology shipments to China for fabs that are operating below 14-nanometer. And so that’s the change I think that people have been thinking might be coming. And our – we’re prepared to fully comply. We’re working with the U.S. government and any impact on Lam’s business it’s contemplated in the September guidance that we just gave.”

So the impact, reductions, in Lams business, have already been calculated into September guidance and the company also said that China impact is part of their reduction of overall annual WFE spend.

Management said fabs operating below 14NM which is only SMIC and then not really in any volume. We think management misspoke, we think the impact is on tools capable of below 14NM not fabs as it would be stupid for the government to allow some fabs in China to get sub 14NM tools while others can’t.

With China representing 31% of Lam’s business, that could be a significant impact. China is by far, Lam’s biggest market with Korea second at only 25% and the US a distant fourth after Taiwan. However it sounds like the details remain fuzzy as to the full impact and the company did not clarify further.
This would obviously impact higher revenue, higher value and higher margins tools sold in China.

We are sure the company is fighting and lobbying this issue as it will have a huge impact. We view this as a much bigger threat than supply chain issues which will eventually work out and perhaps even a cyclical downturn which will eventually resolve. An embargo on China could be very long lasting as it was in the past (which few remember).

This also reflects exactly what we have been saying for a long time…that the US can’t ask ASML not to ship tools to China while US companies continue to ship….This will clearly impact Applied Materials and KLA as well and likely KLA to a greater extent given what they sell is aimed at improving yields and getting down the Moore’s Law curve faster. Do as I say not as I do…doesn’t work.

All the words & body language points to a down cycle (at least in memory)

A large part of Q&A seemed aimed at “what if” a down turn rather than “what if” continued growth….It feels like everyone knows there’s a down cycle coming, we just haven’t seen any hard evidence of it yet, in the form of cancelations or push outs and if there have been any weakness it has been covered up by the continued momentum of strong demand.

If we were only talking about a foundry/logic semiconductor industry, we don’t think the tone would be the same as most all the reported issues have been in memory. The big question is will the economic headwinds get strong enough to slow foundry/logic as well? Or could a China embargo be the catalyst of the foundry/logic slowdown that would join the coming memory slow down? Maybe its both.

It seems a bit like the Borg…..resistance is futile….the down cycle is coming

Supply chain remains an issue but least of our concerns

The company still has supply chain issues but has also clearly made progress. While it continues to weigh on the September and WFE outlook its more of a delay and minor headwind than a cyclical down turn or technology embargo.

We don’t want to make light of it as the management likely spends most of its time on supply chain issues as there is not a lot they can do directly on China or a global macro economic down turn….but it is something they can and do impact

The stocks

If you didn’t listen to the call and just went by the results and guidance, the stock should have been up strongly in the after market….but it wasn’t ….clearly the anxiety of the the triple threat of the economy (memory), China and supply chain cast a pall over what should have been a celebratory party on the great results.

The stock market hates uncertainty and we have it in spades.

We continue to think that the downside beta far outweighs the upside beta. There is too much to go wrong and we already know how great things are. There is not a lot that makes us want to go out and buy the stock. The recent bounce seems to be somewhat of a mirage that things will continue to be wonderful and we aren’t headed into a downturn.

We think perhaps the most important data point on the call wasn’t in the prepared remarks and was glossed over…perhaps on purpose….that Lam was “notified” by the US government about China…..words you never want to hear “notified by the government”.

We can only imagine that now Applied and KLA will have to answer that same question on their calls and will likely give the same answer that they too were “notified” and that it is negatively impacting their outlook

It may take investors some time to figure out that AMT and KLA will say similar things on their calls, so their stocks should be off in sympathy as even higher percentages of their business are from China.

We see this as more negative news for the group and the beginning of confirmation of some of our concerns re China as Lam was the first to talk about it.

I can’t help but think back to my grammar school Charles Dickens, reading a “Tale of Two Cities”….”it was the best of times (for revenue and earnings) it was the worst of times (for anxiety and fear of a downturn).

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.

Also read:

Intel & Chips Act Passage Juxtaposition

ASML Business is so Great it Looks Bad

SEMICON West the Calm Before Storm? CHIPS Act Hail Mary? Old China Embargo New Again?

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