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Morningstar | Lam Research Records Another Stellar Fiscal Year; However, Guidance Notably Weaker

As expected, Lam Research completed its sixth consecutive year of double-digit revenue growth after reporting impressive fiscal fourth-quarter results. However, a near-term slowdown in equipment spending led to lower guidance than we had expected. Specifically, the push-out in equipment purchases in the memory and foundry segments led to the shortfall. Similar to its peers, Lam now foresees calendar 2018 equipment spending to be up in the mid-single digits as opposed to the low-double digits previously. The market appears to have accepted management's explanation that the weakness is transient in nature, as shares rose nearly 5% during after hours to our unchanged fair value estimate of $185. We recommend prospective investors wait for a more attractive entry point for this narrow-moat equipment provider and see a wider margin of safety in Lam's peer KLA-Tencor, a wide-moat process diagnostic and control leader.

Fiscal fourth-quarter revenue rose 33% year over year to $3.126 billion. Sales to South Korea rose 23% year over year, which we primarily attribute to 3D NAND investments by Samsung and SK Hynix and 10-nanometer-related purchases by Samsung. Memory shipments rose 31% over the prior year period, with DRAM shipments more than doubling to $757 million. Meanwhile, foundry shipments fell 30% year over year likely due to a lull in investment by the likes of TSMC. Greater sales volume and a product mix skewed to more advanced equipment drove gross margins up 130 basis points sequentially to 47.3%. The firm continued to demonstrate significant leverage as well, with operating margins surpassing the 30% threshold for the first time. For the full fiscal year, revenue increased 38% to $11.076 billion led by both memory and logic (Intel) shipments, which grew 51% and 88% year over year, respectively, partially offset by declines in foundry (TSMC).

Management projects fiscal first-quarter sales to be at a midpoint of $2.3 billion, which implies a 26% sequential and 7% year-over-year decline. Furthermore, CEO Martin Anstice noted the September quarter will be the trough of calendar 2018. We concur with this sentiment and foresee another healthy year of equipment spending in calendar 2019 thanks to continued spending for 3D NAND, advanced DRAM, and 7-nanometer process technologies in logic and foundry. Consequently, any short-term weakness in Lam or its peers such as Applied Materials or KLA-Tencor could create an attractive entry point.