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Is Lam Research Reliable Amid Macro Challenges?
Stock Analysis & Ideas

Is Lam Research Reliable Amid Macro Challenges?

Wafer fabrication equipment (WFE) supplier Lam Research (LRCX) is enjoying strong demand for its products from 3D NAND manufacturers for critical applications. The company holds the fourth position in the global WFE market with 10.8% market share as of 2020.

The company released its Q1 2022 results on October 20, where it recorded a 34.3% growth in revenues, and 47% growth in earnings on a year-over-year basis.

Despite the rally, sales were lower than Street’s expectations and that did not sit well with investors, leading to a 2.6% decline in the stock prices at market close on October 20, and a further 1.8% decline at the end of Thursday’s trading session. I am neutral on the stock.

Following the earnings release, Needham analyst Quinn Bolton weighed in on Lam Research’s fundamentals and reiterated a Hold rating on the stock. (See Analysts’ Top Stocks on TipRanks)

“Lam Research is the market share leader in etch and holds the number 2 share position in chemical vapor deposition (CVD), the two largest WFE categories that saw the fastest growth over the past WFE cycle,” he explained.

However, Bolton observed that the NAND WFE market is moderating, while WFE growth is expected to be fueled more by DRAM and foundry/Logic (F/L) in 2021 and 2022.

However, that the company’s share in the NAND market increased in 2021, while decreasing in the DRAM market and remaining unchanged in the F/L market, which concerned the analyst. He believes that the rise of DRAM and F/L in the WFE growth story will “mitigate” Lam Research’s strength in the NAND market.

Taking into account the supply issues and moderating the NAND market, Bolton said, “While management cited supply chain constraints that have resulted in a meaningful level of unmet demand as a factor holding back near-term revenue, we believe a moderating NAND WFE outlook is another factor.”

Management expects revenues from China, which accounted for 37% of total quarterly revenues, to drop sequentially in Q2. This is also a near-term concern, according to Bolton.

Turning to Wall Street, the analyst consensus seems to be cautious but optimistic about Lam Research, with a Moderate Buy rating based on eight Buys and seven Holds. The average Lam Research price target of $677.08 indicates an upside potential of 18.3%.

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Disclosure: At the time of publication, Chandrima Sanyal did not have a position in any of the securities mentioned in this article.

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