Weekly Equity Idea Highlight - 2018 09 26
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 10% 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.
The company's Q4 earnings call does highlight some reason for near-term potential fundamental volatility, with concerns about customer equipment spending softening in the near-term, and about their outlook for the foundry business. While management is confident about the positioning of their nonvolatile memory business, those concerns, which were a negative inflection from the Q3 call, do point to some near-term headwinds. That being said, with current overly pessimistic management, the market is already pricing in longer-term issues which are unrealistic, setting the company up for equity upside going forward.
Considering unnecessarily low market expectations, and stable strong profitability, LRCX appears undervalued. Long-term macro tailwinds, strong management execution, and favorable alignment point to reasons to believe in continued strong returns and equity upside, even with near-term potential fundamental headwinds.
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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