LRCX Good but not good enough results, AMAT Epic failure and Slow Steady Recovery

• Lam reported good numbers with slightly soft guide
• Investors are figuring out the up cycle will be slower than thought
• Looks like AMAT won’t get CHIPS act money for Epic facility
• Steady improvement but stocks still ahead of themselves-Correction?

Lam reports good numbers (as usual) but guide not good enough

Lam reported a good quarter with a standard “beat” (as expected) but the guide was a bit on the weak side. The stock is trading off as investors are clearly disappointed with the softer outlook.

This should not be a big surprise as we have been warning that this down cycle recovery will be slower than prior up cycles as there is still a lot of weakness in areas and not all segments are recovering.

We have mentioned in almost everything we write that while AI & HBM are nothing short of fantastic , HBM is a single digit percentage of the overall memory market.

AI takes a big slug of bleeding edge capacity but the ramp of leading edge is limited. Trailing edge is not so great and the rest of memory (non HBM) is also “muted” especially DRAM

Its clear that as we have been saying, the stocks have been ahead of themselves as the ramp of the upcycle , off of the bottom, will not be as steep an incline as in previous cyclical recoveries.

The word “modest” used way too many times in the call

Management was clearly sending a “calm down” message to investors as they overused the word “modest” in too many circumstances . The word “soft” was also used a few times.

So while things continue to get steadily better, its not in a hurry and 2024 looks OK but far from a “bounce back” that investors have seen in past cycles

Margin “headwinds” coming soon due to customer mix. Read that as less Chinese “suckers” paying inflated prices

As China percentage of revenues come down, so will the high margins associated with that business which will cause margins to fall faster than expected.

We mentioned this issue in our previous note and we were somewhat surprised to hear a company admit to “margin headwinds” due to customer mix coming in future quarters.

This will be an outsized impact on profitability as China may account for over 50% of profitability due to these outsized margins.

This will add to the slowness of profitability recovery. Revenues will likely recover faster than profitability

AMAT won’t get CHIPS Act money for EPIC facility

We have been highly critical of Applied Materials asking for $4B in CHIPS Act funding with one hand while on the other hand shipping jobs out of the US to Singapore as they are building a record breaking facility there.

We have viewed it as super hypocritical.

In addition Applied seemingly put a gun to their own head threatening “suicide”, back in April, to not build the Epic facility if they didn’t get CHIPS Act money.

It looks like the government called their suicide bluff and Applied won’t be getting CHIPS Act funding for Epic.

Link to AMAT CHIPS Act denial for Epic

Applied has more than enough cash to build the Epic center, without government help, and it is clearly a false threat to not build it if they don’t get the money as they would only be shooting themselves in the foot.

ASML is doubling down in their R&D in Eindhoven and AMAT needs to increase R&D to keep up with the rest of the industry with ASML already passing Applied.

Applied is not the only company shipping semiconductor jobs out of the US as Lam announced on their call their pride in achieving 5000 chambers being shipped out of Malaysia. But we haven’t heard of Lam asking for $4B from the CHIPS Act either…

The Stocks

We continue to view the stocks as being ahead of themselves. Investors assumed we would be off to the races in a normal “bounce back” cyclical recovery, but that’s not happening….

Its going to be a slow and steady recovery with both positives (AI & HBM) and negatives (falling China related margins)….

The balance of 2024 looks OK but not great, there are more hopes being pinned on 2025 but its far from certain just yet. Companies are not willing to go out on a limb as to 2025 just yet.

There will be some rationalization between the stock prices, multiples, expectations and reality and we have clearly seen the first leg of that rationalization.

The future of the industry is certainly very bright and the key questions are both how bright that light is and how far away it is….and it may be a bit further away than investors had assumed…..

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Also Read:

The China Syndrome- The Meltdown Starts- Trump Trounces Taiwan- Chips Clipped

SEMICON West- Jubilant huge crowds- HBM & AI everywhere – CHIPS Act & IMEC

KLAC- Past bottom of cycle- up from here- early positive signs-packaging upside

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