INTC - Lam Research: No Material WFE Recovery In H2 2023

2023-09-12 16:53:44 ET

Summary

• We remain hold-rated on Lam Research Corporation.
• We don’t think the current strength in its advanced packaging and domestic Chinese businesses is enough to materially offset weakness in advanced foundry/logic and advanced memory demand.
• Management expects 2023's WFE market to contract 21% Y/Y, a modestly better-than-previous estimate of 21-25% driven by panic-buying from Chinese customers concerned with expanded export restrictions by the Biden administration.
• We don't expect material recovery in WFE spending until 2H24 as end-demand in the advanced process node for foundry is very mixed, and the memory industry remains in over-capacity.
• While Lam Research is well positioned in the mid-to-long run in the industry transition to increased complexity in etch and deposition, we expect the stock to be an in-line performer in 2H23.

We continue to be hold-rated on Lam Research Corporation ( LRCX ). We don't expect a material recovery in WFE spending before 2024 as we don't think the current strength in its advanced packaging and domestic Chinese businesses is enough to materially offset weakness in advanced foundry/logic and advanced memory demand. Hence, we see LRCX being an in-line performer without a catalyst to drive upside in the near term. Over the past two weeks, management presented at the Evercore ISI 2023 Semi and semi-cap conference and the Deutsche Bank conference, and the calls only further confirmed that the downward trend is not done, nor is it fully priced into the stock.

We think LRCX's outperformance will correlate to an uptick in WFE spending; management revised their estimates on the 2023 WFE market contraction this quarter from 21-25% Y/Y to a more modest 21% Y/Y decline. We're not optimistic about near-term WFE spending. Still, we see WFE spending increasingly more substantially in 2024 driven by the industry transition to more complex etch and deposition due to product cycle upgrades; take Intel ( INTC ) Sapphire Rapids and Gen1; both "will more directly pair with DDR5 and not DDR4" in reference to industry transition in DRAM. We believe management's revised 2023 WFE market estimates are not a sign of a true material rebound in WFE spending. Instead, we think the modestly better estimate is due to stronger demand from Chinese customers. We've seen reports of increased Chinese customer demand from the semi-cap names this quarter, including ASML ( ASML ) and Applied Materials (AMAT), due to customer panic over the expanded export restrictions by the Biden Administration. We don't think a true WFE spending recovery will happen before 2024.

The following graph outlines our rating history on LRCX.

Watching memory

We're closely watching the memory market for improvement in pricing and utilization. The current memory market is so bad that it's unlikely to get worse - that's how management sees it, too. DRAM is now expected to recover ahead of NAND due to product cycle upgrades. Still, we think that it's likely that DRAM and NAND recover together. For the near term, the memory market remains in over-capacity, and we continue to see a mixed demand environment in advanced process nodes for foundry. We recommend investors wait on the sidelines for memory improvement before exploring entry points.

Valuation

LRCX is trading relatively in line with the peer group average. On a P/E basis, the stock is trading at 21.7x C2023 EPS $30.39 compared to the peer group average of 29.5x. The stock is trading at 5.5x EV/C2023 Sales versus the peer group average of 5.7x. We think the weakness is being priced in, but don't see a favorable risk-reward profile for the stock in 2H23.

The following chart outlines LRCX's valuation against the peer group.

Word on Wall Street

Wall Street is leaning towards a bullish sentiment on the stock. Of the 29 analysts covering the stock, 15 are buy-rated, and the remaining are hold-rated. We think Wall Street's bullish sentiment is the result of LRCX's position in the etch and deposition industry and expectations of recovery ahead of 2024.

The stock is trading at $660 per share. The median sell-side price target is $690, while the mean is $670, with a potential upside of 2-5%.

The following charts outline sell-side ratings and price targets for LRCX.

What to do with the stock

We remain hold-rated on LRCX. While we continue to believe LRCX is well positioned in the mid-to-long run to benefit from the industry transition to increased complexity in etch and deposition alongside product cycle upgrades, we don't think the current strength in its advanced packaging and domestic Chinese businesses will materially offset weakness in advanced foundry/logic and advanced memory demand.

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