LRCX - Embedded Expectations Analysis - 2020 08 28
Lam Research Corporation (LRCX:USA) currently trades below corporate averages relative to UAFRS-based (Uniform) earnings, with a 15.2x Uniform P/E. At these levels, the market has bearish expectations for the firm, and although management appears concerned about revenue, margins, and spending efficiency in China, market expectations are overly bearish, suggesting longer-term upside remains warrantedSpecifically, management may lack confidence in their ability to sustain multilayer application wins and gross margins. Furthermore, they may be concerned about spending efficiencies in China and investment expenses offsetting their savings. Also, they may lack confidence in their ability to sustain revenue in their system, foundry/logic, and total memory segments. In addition, management may be overstating the sustainability of wafer-fab equipment (WFE) demand in China, and they may lack confidence in their ability to use big data to efficiently detect issues on customer sites. Finally, management may be concerned about their centers' ability to support the enhanced data traffic and the recent downtick in smartphone sales
However, although management's concerns about revenue, margins, and spending efficiency in China suggest the potential for near-term headwinds, market expectations remain far too bearish given the firm's long-term industry tailwinds and strong corporate performance, suggesting longer-term outperformance is likely warranted for LRCX
Lam Research is a supplier of wafer fabrication equipment and services to the semiconductor industry. The company designs, manufactures, markets, refurbishes, and services semiconductor processing equipment used in the fabrication of integrated circuits. The company's customer base includes semiconductor memory, foundry, and integrated device manufacturers that make products such as non-volatile memory, dynamic random-access memory, and logic devices. The company's services include customer service, spares, improvement, and refurbishment of its deposition, etch, and clean products. The company sells its products and services to companies in the United States, China, Europe, Japan, Korea, Southeast Asia, and Taiwan.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
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