What happened
Semiconductor equipment market Lam Research (LRCX -5.29%) saw its stock rise 11.1% in July, according to S&P Global Market Intelligence. Shares surged on renewed optimism that the semiconductor cycle may be turning for the better, especially the environment for NAND flash memory. Lam Research capped off the month with a mixed second-quarter earnings report that beat analysts' earnings expectations, yet missed on revenue.
NAND flash is nonvolatile memory, which has been in a severe downturn for the past year and a half. Lam Research makes the equipment that allows flash companies to execute the difficult process of stacking NAND memory modules. Therefore, when the NAND flash market falls into a slump, so do the prospects for Lam Research. Last quarter, Lam got 46% of its revenue from NAND flash customers and 18% from DRAM memory, along with 23% from foundries and 11% from logic.
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So what
The NAND market has been in its own recession for the past year and a half, amid widespread industry oversupply. Yet the sector had several favorable developments over the past month or so.
In June, there was a power outage at a NAND fabrication plant owned by Toshiba Memory Holdings and Western Digital, which took a meaningful amount of supply offline. Then a conflict between Japan and South Korea fueled concerns that the large South Korean NAND producers Samsung and SK Hynix (OTC: HXSCL) would have supply issues. Third, SK Hynix revealed on its earnings report that it would be limiting its NAND wafers by 15% this year in an effort to ease some oversupply.
These supply constraints led to NAND flash and DRAM spot prices increasing after a year-long-plus period of severe pricing declines, giving hope that the sector may be poised for a turnaround.
Now what
On the conference call with analysts, Lam Research said it had not yet seen a recovery for memory spending, but did see positive signs, including "demand elasticity, pricing trends, and management of factory utilization to bring inventory down."
There is also optimism about renewed demand for foundry and logic, as several large chip companies have recently displayed sequential growth on their earnings reports, and expressed hopes of a second-half recovery. Still, with new China tariffs coming on Sept. 1, investors should continue to monitor events in the sector for either accelerating or flagging demand.
