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Morningstar | Despite Near-Term Headwinds, Shares of Lam Research Look Appealing Versus $185 Fair Value Estimate

We are adding Lam Research to the Best Ideas list, as we remain positive on the wafer fabrication equipment, or WFE, market heading into 2019. Lam has benefited greatly from the sharp rise in spending by memory customers, though recent customer commentary suggests a near-term pullback in spending for the end-market (especially in 3D NAND). Although total WFE spending will likely be modestly lower in 2019, with softer memory investments mostly offset by strength in logic and foundry, we foresee firms such as Lam being able to achieve solid levels of profitability by effectively controlling costs. Furthermore, we anticipate share gains for Lam in key multiple patterning steps at logic and foundry customers such as Intel and TSMC at advanced process nodes. Consequently, we view shares of narrow-moat, positive trend Lam as attractive versus our fair value estimate of $185 per share.

Chipmakers that have continued along the trajectory prescribed by Moore's law have endured significant challenges in terms of cost and complexity. Equipment providers are vital to making the pursuit more economical via advanced chip manufacturing tools. Lam has benefited from the sharp rise in etch, deposition, and clean steps required as a result of major inflections, including FinFET and 3D NAND flash storage, that feature multiple patterning and vertical layers well suited for Lam's advanced etch and deposition offerings.

We attribute the recent sell-off across semiconductor stocks to an assortment of factors including macro-related concerns such as tariffs, the escalating trade war between the U.S. and China, inventory builds, and memory price declines. However, the end-market diversity beyond PC and smartphones for semis, which includes the shift to the public cloud, rise in automotive chip content, investments in 5G, and Artificial Intelligence should collectively allow for less cyclical behavior for overall WFE patterns, in our view. We think memory customers are better equipped to navigate “downturns” with greater cash cushions and profitability levels from the recent memory upswing, thanks to more rational behavior from a supply/demand standpoint. As such, short-term delays in equipment spending by Samsung and Micron shouldn’t last nearly as long as past downturns, which bodes well for Lam and its peers.