Weekly Equity Idea Highlight - 2018 04 25
Current market expectations for LRCX are overly pessimistic. Markets expect UAFRS-based (Uniform) ROA to decline from current 30%+ levels, where it appears to be stabilizing, dramatically to 13% over the next few years. The market appears to not recognize the fact that their customer base has consolidated, which has changed the dynamics of demand for the business, and also the market is currently in a supercycle for demand for storage chips which they provide the equipment to make, which can offer the company a prolonged positive cycle. Considering these factors, the company likely has far stronger fundamentals for the next several years than the market recognizes.Also, LRCX management is specifically compensated to improve their margins, a key factor in maintaining their Uniform ROA, while also taking market share in the business, helping them drive their growth at rates even higher than the business as a whole, spelling reasons to think they can outperform overly pessimistic market expectations.
Lastly, on the company's Q3 earnings call, management showed a positive inflection, even as the market was punishing the company for concerns about the outlook. Management showed confidence about their gross margin trend, and their outlook for bookings. They also showed growing confidence about their competitive advantages and their differentiated offerings and innovative leadership. These signals highlight that management is positive about their visibility and profitability, even as the market is overstating concerns about operations.
Considering unnecessarily low market expectations, and stable strong profitability, LRCX appears undervalued. Long-term macro tailwinds, strong management execution, growing management confidence, and favorable alignment point to reasons to believe in continued strong returns and equity upside.
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.
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