On a Roll, Lam Research Can Go Higher Still

 | Apr 18, 2017 | 10:00 AM EDT
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After the close, Lam Research (LRCX) kicks off the semi equipment reporting season. Investors are anticipating another blockbuster quarter, but are increasingly concerned about a slowdown in the back half of the year.

I have been bullish on shares of Lam Research for a while. Last October, after the merger with KLA-Tencor (KLAC) fell apart, I thought Lam was worth $105 per share.

In January, I updated my thesis and thought the stock could reach $130. As of last Thursday's close, it was only three points away from my target price.

With Lam up nearly 28% since October, can this stock continue to manufacture a higher price? The company reports after the close today. Analysts are expecting revenue of $2.13 billion and earnings per share of $2.55.

Coming out of the January quarter, Lam had tremendous momentum. Foundry wafer shipments were up 40% in calendar 2016, compared to industry growth that it estimated at 25%. The company grew NAND shipments by 80%, at what it said was almost twice the industry pace.

On the January conference call, management saw shipments jump 22% sequentially to $2.3 billion. In fact, the company forecasted tight supply and demand throughout 2017. Management expect semiconductor makers to focus their efforts on converting their fabs to manufacture 1x DRAM (i.e. 10 nanometer DRAM), since 20 nm (nanometer), first produced in 2014, are getting long in the tooth.

Furthermore, the company expects the 3D NAND transition to continue, as customers are in the early stages of adopting solid-state storage. In fact, the company is forecasting over 700,000 wafer starts per month (WSPM) by the end of 2017, up from approximately 400,000 in 2016. Compare that to 1.4 million WSPM of conventional NAND storage, and the 3D NAND transition could continue for quite some time.

Between 2016 and 2020, Lam believes $50 billion will be spent for wafer fab equipment to manufacture 3-D NAND memory. Lam thinks it can take about half the growth in the market. The worldwide semiconductor market is expected to grow between 5% and 7% in 2017 to $358 billion, while semi equipment capex is likely to grow about 4%.

Investors are concerned that semiconductor makers will slow their capex into the second half of the year as they digest the $34 billion worth of equipment they bought last year.

While I wouldn't be surprised by a temporary slowdown, I think Lam can continue to outperform the industry throughout the year.

First, at the November analyst meeting, the company said its equipment addresses approximately 45% of the 3D NAND market, up from 20% of the planar NAND market, which should keep equipment sales strong all year as memory makers scramble to get on the 3D NAND trend.

Second, the shift to 1x and even 7 nm DRAM continues at a brisk pace. Samsung alone is expected to add 30k WSPM of 1x capacity at its fabs in the second half of the year. Samsung should help to smooth out the bumps between the quarters.

And finally, Lam seems to be aggressively taking market share. The management think the company can take 3-4% share in etch and 4-8% share in deposition this year. Share gains should help make any slowdown less shallow.

Overall, I think Lam Research can go higher. The stock is trading at just 13x consensus 2017 estimates of $9.27 per share.

Because the semi equipment industry is so cyclical, investors place low multiples on the shares. Typically, these stocks trade between 13 and 16x forward estimates.

Given the growth prospects of 3-D NAND and the length of the cycle, I think it's reasonable for the stock to trade as high as $150 per share, or just 16x estimates, as the company earns a multiple closer to the high end of its historical range.

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