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Lam Research: Flash, AI and Moore’s Law

Lam’s standout performance is driven by quality products, strong customer relationships and surging demand growth.

We are initiating coverage of Lam Research (LRCX) with a buy rating, based on growing demand for the company’s semiconductor capital equipment solutions and a healthy industry environment. Our long-term rating is also a Buy, says James Kelleher, analyst with Argus Research.

Lam Research reported fiscal 4th quarter 2017 (calendar 2nd quarter 2017) results that included 8.9% sequential revenue growth, and 11.1% sequential improvement in non-GAAP EPS.

We view this as another quarter in a multi-year expansion for the semiconductor industry and semiconductor capital equipment sales.

Shipments rose to $8.6 billion in fiscal year 2017 (ended June) from $5.9 billion in fiscal 2016, while revenue rose to $8.0 billion from $5.9 billion, and cash from operations rose to $2.0 billion from $1.4 billion.

Lam provides tools for etch, deposition and other wafer manufacturing processes. Lam’s standout performance is driven by quality products, strong customer relationships and surging demand growth.

The company is benefiting from particularly strong demand growth and pricing power in memory, which was the source of three-quarters of Lam’s system shipments in fiscal 4th Quarter 2017.

As industry participants confront the impending end of Moore’s Law (which posited an annual doubling in transistors per square inch on an integrated circuit), semiconductor companies are seeking to improve chips’ performance through more intricate circuit design, using techniques such as vertical scaling.

LAM products directly enable vertical scaling and other key technology advancements.

President and CEO Martin Anstice reported on July 26, 2017 that “Demand trends in our key end markets have improved, and we are on track once again to outperform overall industry growth in calendar 2017.”

The company described memory customers as planning higher incremental capital spending. Within the memory segment, shipments for non-volatile (flash) memory markets loomed larger in the segment mix for fiscal 4th Quarter 2017, at 59% of shipments compared with 14% for DRAM; a similar dynamic held in fiscal 3rd Quarter 2017.

Demand for flash memory is being driven in part by AI data needs. Lam grew significantly by the acquisition of Novellus Systems in 2012.

The company took on debt at the time, but paid down its long-term debt by about half in fiscal 2017. Lower debt levels may contribute to the attractiveness of LRCX’s shares.

The mutual decision in October 2016 to scrap a merger with KLA-Tencor (amid DOJ pressures) will prevent a similar build-up in debt. We are initiating coverage with a Buy rating and a 12-month target price of $196.

James Kelleher is director of research at Argus Research Corporation.

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