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                                
2.55 %
Shares Sold short           
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 

4)     Service revenue - Their service revenue is up 50% from last quarter and their long term objective to make 50 / 50 - service revenue (service, replacement, resell, etc) with installed base. So more spending on the WFE meaning more service revenue in future.

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