Weekly Equity Idea Highlight - 2020 03 02
Current market expectations for LRCX are overly pessimistic. Markets expect UAFRS-based (Uniform) ROA to decline dramatically from current 28%+ levels, where it appears to be stabilizing to 18% 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. The market also does not appear to recognize that they are currently in a super cycle for demand for storage chips, which are made using the equipment that LRCX provides, potentially offering 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's 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.
Importantly, the company's Q3 earnings call also highlighted that while management is concerned about growth rates being sustainable going forward, they are not at all concerned about profitability. With the market concerned that ROA is going to fall by over 1/3 in the near-term, this signals the market still misunderstands the business.
Considering unnecessarily low market expectations, and stable strong profitability, long-term macro tailwinds, strong management alignment, and growing positive fundamental momentum, LRCX appears undervalued.
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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