Where there’s Smoke there’s Fire: UCTT ICHR LRCX AMAT KLAC Memory

-UCTT & ICHR both pre announce ugly QTR & blame memory
-LRCX is the memory “poster child” & most impacted
-This is on top of China & Economic issues & memory specific
-Clearing out inventory is a sign of expected slow recovery

UCTT & ICHR pre-announce ugly quarters

Both UCTT & ICHR that are big suppliers to both Lam and Applied, pre-announced a sharp drop in business and seem to indicate it isn’t just a one and done but longer term issue. Both said that memory related business was the main cause of the miss. Lam is obviously the most memory centric of the equipment OEM’s

That flushing sound is inventory

It sounds like OEMs are flushing inventory and orders for new inventory to reduce their exposure (as they should) . This reduction sounds larger and more severe than prior, short lived downturns or pauses in the industry. This seems to suggest that OEMs are expecting a longer, deeper downturn than in recent past-not just a brief pause.

Sub suppliers are the end of the whip but all on the whip are impacted

Sub suppliers such as UCTT & ICHR are near the end of the whip and thus most volatile but others further up the chain will get hit given the level of impact we see at this part of the food chain.
The chain is: Consumer, Product OEMS, Samsung/Inte/TSMC, equipment OEMS, sub suppliers & raw parts suppliers.

LRCX sounds like a “short”

Lam is the most impacted by the memory industry and is one of the biggest customers of both UCTT & ICHR that just missed badly, likely due to a lot of Lam cancelations. Lam supplies both Samsung and Micron.
This is a lot of smoke surrounding Lam which usually indicates a fire.

Negative news will be obscured by goods in field & backlog

Lam had previously reported billions of dollars of almost finished product sitting in crates in the field waiting on parts or completion. Those dollars sitting in crates and a longer than usual order backlog will obscure the actual drop in business that the company is experiencing especially at the bottom line as much will come in at high margin.

The question to ask and be answered on the conference call is what business would look like without all that built in buffer that softens the initial blow.
The main problem is that the buffer will get used up relatively quickly.
This suggests that Lam will not likely miss the quarter as it can manage through this buffer but forward guide on business may not be as strong.

Other sub suppliers that may have issues

AEIS, Advanced Energy, is, at its core a sub supplier of power assemblies to the semiconductor equipment industry and even though more diversified than UCTT & ICHR will get hit as their semi equipment business is higher margin business. MKSI started out as a sub-supplier but has diversified so much that the impact will be minimal.

AMAT & KLAC to a lesser extent

AMAT & KLAC are not nearly as impacted by memory as Lam but still are, as no one in the business can avoid it. KLA’s backlog is second only to ASML so they should weather this the best of the three with AMAT somewhere between.

The stocks

We find it amusing and typical of Wall St that there are many Strong buys and Buys on LRCX with a couple of market performs but no Sells? Yes, the very long term secular view remains very positive but why own it if its going down and likely to report a poor outlook. I can buy back in later at a cheaper price and catch the long term upside. Everyone is talking about WFE being down 20% or more with memory significantly worse than that. We seem to be in a triple whammy of China, the economy and memory and most analysts remain with buy ratings. We are in the middle of a cloud of smoke but no one is yelling “fire”.

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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