Lam Research Corp. shares rallied Thursday as Wall Street cut their target prices, anticipating a bottom to the stock as the chip equipment maker posted earnings that beat expectations and a strong forecast.
shares surged as much as 11% to an intraday high of $366.92 and were last up 6.5%. At Wednesday’s close, Lam Research shares had fallen 54% year-to-date, compared with a 44% drop in the PHLX Semiconductor Index
a 23% decline by the S&P 500 index
and a 32% fall in the tech-heavy Nasdaq Composite Index
Late Wednesday, Lam reported a beat-and-raise quarter even though it outlined headwinds, hours after Netherlands-based chipmaking-equipment company ASML Holdings NV
similarly reported a beat-and-raise quarter, following weeks of profit warnings from chip makers leading up to earnings season.
In the report, Lam said that U.S. restrictions on sales to China, estimated to hurt sales in 2023 by $2 billion to $2.5 billion — up to 15% of its fiscal 2022 revenue — and that wafer fabrication equipment revenue will drop more than 20%, with memory-chip companies like Micron Technology Inc.
accounting for a large chunk of that, all while topping Wall Street estimates by a fair amount.
Lam Research Chief Executive Tim Archer reminded analysts that he was releasing the wafer fabrication equipment estimates three months earlier than normal, to underscore the company’s transparency on the outlook, while Chief Financial Officer Douglas Bettinger said the company knows its way around a downturn.
“A perfect storm is hitting Lam’s business, with the company likely the worst impacted by the new U.S. China restriction,” as well as most levered to memory chips, said Evercore ISI analyst C.J. Muse, in a note titled, “Shares Approaching a Bottom; Now’s the Time to Sharpen Your Pencils.”
Muse, who has an outperform rating on the stock, cut his price target to $450 from $500.
“This is not Tim and Doug’s first rodeo, so we expect they will prudently manage the ramp of the Malaysia factory and operating expenses from here (important considering 33% headcount increase over the last 5 Q’s),” Muse said.
Bernstein analyst Stacy Rasgon called the outlook “surprisingly strong,” but said that Lam executives are “not blind to the current environment either.”
The early release of the estimated wafer fabrication equipment drop of 20% from around $90 billion is something of a sweet spot for the stock, “suggesting something in the ballpark” of about $70 billion next year, said Rasgon, who has an outperform rating, and lowered his price target to $425 from $500.
“Most buy-side investors have been eyeing a ~$70B WFE number for some time, and have wanted nothing else but for semicap companies to suggest it as well, in that light we are glad that Lam gave us the number (and earlier than their normal practice would typically suggest),” Rasgon said. “So while Lam estimates are going to come down now, likely materially, it should be very helpful for the shares to finally find a bottom.”
In a note titled “WFE Capitulation – Are We There Yet?” Citi Research analyst Atif Malik supported that the estimate was “in-line with the majority of buy-side expectations and Citi’s $72B view.” The Citi analyst has a buy rating on the stock and held his $560 price target.
“While WFE could go lower next year (Citi’s bear case/macro hard landing scenario $65B/$50B), the big estimate cut is done, in our view,” Malik said.
“Net-net, we like the stock especially since the memory weakness in CY23 is well understood and China WFE is out of the numbers,” said Cowen analyst Krish Sankar in a note. Sankar has an outperform rating and a $430 price target on the stock.
“Lam is well-positioned for future technology inflections,” Sankar said. “The risk is if leading and lagging edge foundry/logic spending declines significantly next year, it could lead to further estimate cuts.”
Of the 26 analysts who cover Lam, 16 have buy grade ratings and 10 have hold-grade ratings. Of those, 13 lowered their price targets, while only one hiked theirs, resulting in an average price target of $424.14, down from a previous $546.95, according to FactSet data.
In fact, the SOX index outperformed the broader market Thursday, rising 1%, as the S&P 500 and Nasdaq both slipped more than 0.5%.
Shares of other chip-related companies outperforming the SOX index Thursday were KLA Corp.
which reports earnings this coming Wednesday, Applied Materials Inc.
and Advanced Micro Devices Inc.