Lrcx - Published on 8/24/2018
Lam Research (LRCX) - $172.46 as of 8/24/2018 4 pm.
Company Introduction
Lam research is a
semiconductor equipment manufacturing company that makes equipment for
mainly memory (NAND Flash & DRAM) and foundry & logic. Based on
the recent quarter - 80% memory (up 7 % year over year)
and 13% foundry (Down 9%). Rest is foundry. Their main (10% above
revenue) customers are - Samsung Electronics Company, Ltd.; SK hynix
Inc.; and Toshiba, Inc.
Market Cap
|
27.18
|
Current Yield
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2.55 %
|
Shares Sold short
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15.97 M / 10.22 % of float as of 8/15/2018 ( up 22.27 % - highest in over a 1 year)
|
Current Valuation
Based on the customer's
profile and their products profiles, I can say that health of their
customer and current memory cycle greatly affect their valuation and
stock price, Which is undervalued in my opinion.
P/E (TTM) 12.97
|
Forward EPS Long Term Growth (3-5 Yrs.) +21.40%
|
Free Cash Flow (TTM) $2.38B
|
Cash Flow Growth Rate (Last 5 Years) +45.30%
|
Return on Equity Recent Quarter, Annualized) 62.82%
|
Total Debt/Equity (TTM) 42.09% (44th in the industry)
|
2021 Financial model $23-$25 EPS , Free cash flow - 1.8 B
|
Their strategy is to return at least 50% free cash flow over next 5 year. So far they have already
returned 60% of the current cash flow (4 B since 2017). And planning to return rest over next 9 months.
Why it's undervalued
In my opinion, it's a growth stock trading as a value. The main reason for following are:
1)
Shipment delay by Samsung(Memory cycle is ending)
- Fairly recently, stock has suffered greatly because of the production
delays of DRAM & NAND at Samsung. Analyst CJ Muse from Evercore ISI
mentioned this back in end of May.
As a result stock declined from $199s to $180s in few days. Also in
recent earnings, CEO mentioned that September quarter will be the LOW
point for the equipment delivery.
2)
Trade War between US & China - They get
more than 15 % of revenue from china and because of the semiconductor
initiatives from china ( majorly memory), they are in the crosshairs of
trade war. As a result stock further declined from
$180s to $170s (upper $160s sometime).
Bullish case
1)
Autonomous cars - I believe market, most of
the times, Undervalue or overvalue a stock based on - if it's "in favor"
or "out of favor". So currently Lam research is "out of favor" and will
be till September earning calls (partially
if trade war issue resolves). Back in 2017, this was one of the hottest
stock, almost doubled in price because of the future trends like
autonomous cars, datacenter, smart cities, etc. Most of that was already
priced in when the stock was at $233 (shortly
after investor day). That was just a speculation because most of the
trends are not here yet expect Datacenter revenue ( 3D NAND & DRAM
is used by cloud providers like AWS, Alphabet, Microsoft, etc).
Actual
autonomous car trends still need to come. Autonomy requires "seconds
level decision" required at the edge location (autonomous car) as
compared to cloud location, A good amount of semiconductor
content ( memory & logic) will be used in the cars. And car
manufactures just have the testing phase established for autonomous
cars. Commercial phase will at least use 35 % - 50% more NAND flash
& DRAM.
So
basically long term trends are still intact and will drive the stock
higher in the long term. Their current down stock price is NOT a result
of company's health or execution. Also wild price
swings ( 10%) was a result of difference of revenue and actual shipment
date (that happened back in may), now they will be using the new
accounting rule which will align the revenue with actual shipment. This
way it will easier & accurate to predict the realized
revenue.
2)
China Demand: China is spending on building
its semiconductor industry and for that it does require equipment and
"know how from Lam. So once the trade wars concerns are over, china have
even bigger motivation to build its domestic
semiconductor. This will further drive WFE (wafer fabrication
equipment) sales. CEO mentioned back in sept 2017 quarter they are
tracking 12-18 domestic & foreign projects in china.
3)
Short interest - Because of the reason
mentioned in "undervalued " section , short interest is at the highest
level .Most of the bad news regarding the shipment delay and trade war
is already priced in and any good news will start
the rally. This happened recently when the short sellers were covering
after the company reported the 2nd quarter earnings. Stock ran to $195
from $175. Same rally can start after trade war concerns are settled.
I
believe the best time to buy this stock is from now till September
quarter earnings since bad news is majorly priced in. I can say that the
stock is priced partially for data center , cellphone
& pc trends. And autonomous cars & A.I. is not priced in. They
have a historical P/E of 19 (approx.) so there is a reasonable upside
from this level. Based on the historical YTD movement, I believe with
current trends, the price should be close to $200 and
in future, autonomous cars can push up the valuation & P/E
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