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Morningstar | Lam Research Records Solid 3Q Despite Weak Appetite by Memory Customers; Raising FVE to $190

Lam Research is a leading vendor of semiconductor fabrication tools. The firm is the market leader in etch, a critical step in the chipmaking process where material is selectively removed. Lam has expanded its product offerings inorganically in recent years. In 2008, the company acquired SEZ for $483 million in cash (net of cash acquired) to enter the clean equipment market. Then in 2012, Lam merged with Novellus in a $3.3 billion stock deal to gain a leading position in the deposition segment. In 2016, Lam's attempted merger with KLA-Tencor fell through as the combination would have resulted in an equipment powerhouse that customers likely viewed as having too much supplier power.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. Consequently, Lam is poised to grow faster than the overall equipment industry, as we think it can capture a larger share of the market with technically superior tools.The volatile nature of demand for semiconductors directly affects the cyclicality of the equipment market. Lam, along with its peers, has benefited from an increase in service revenue in recent years, which we believe will mitigate the reliance on the volatile nature of customer equipment orders. Specifically, maintenance and engineering costs and spare parts are tied into service contracts, that deliver a stable revenue stream distinct from tool purchases. As traversing Moore's law becomes increasingly difficult, we expect the service segment will grow as chipmakers increase their reliance on field service engineers from Lam and its peers, while also helping entrench vendors' installed base of tools at customer facilities.