Lam Research Earnings: Dreary Memory Demand Doesn’t Cloud Our Long-Term Optimism

Wide-moat Lam Research LRCX reported fiscal third-quarter results in line with our expectations, with weak memory equipment sales partially offset by strength in foundry and logic applications. Management expects calendar 2023 wafer fab equipment spending to be down over 25% to the low- to mid-$70 billion range, which is slightly lower than our outlook. Due to elevated inventories, weaker end-market demand, and macroeconomic headwinds, we’re seeing slowing equipment demand at many of Lam’s key customers. Historically, Lam was most leveraged to memory chipmakers, which have slashed their 2023 capital expenditure budgets by 40% to 50% on average. Although the firm has done well to gain share at logic and foundry customers such as TSMC and Intel, we see the next several quarters being quite rough for Lam. However, we believe this weakness is mostly priced into the stock, and we see shares of Lam as undervalued relative to our unchanged $620 fair value estimate.

March-quarter sales fell 5% year over year and 27% sequentially to $3.9 billion. Combined memory system sales fell 59% sequentially. While the firm had record foundry sales (over $1 billion for the quarter), we anticipate declines in logic and foundry sales in the coming quarters, as the likes of TSMC and Intel also tighten up spending, albeit not to the same severity as their memory counterparts. Sales to China fell 33% sequentially due to export restrictions, but we expect the firm to continue to benefit from domestic Chinese foundry demand for its tools used to make chips for automotive and industrial applications.

Management expects June-quarter sales to be at a midpoint of $3.1 billion, plus or minus $300 million, which would be down 20% sequentially and 33% year over year. Although memory sales are already at their lowest levels in over six years, we see no signs of improvement based on recent negative commentary from Micron and Samsung.