Lam Earnings: Chip Softness Still Affecting Results, but We’re Glad to See Rebounding DRAM Sales

We maintain our $620 fair value estimate for shares of wide-moat Lam Research LRCX after it reported fiscal first-quarter results largely in line with our expectations. Lam posted a good quarter, in our view, considering the ongoing hefty headwinds in the memory chip markets that have weighed on sales. It raised its wafer fab equipment, or WFE, industry outlook for calendar 2023, and management said recently heightened U.S. export restrictions to China shouldn’t have an incremental impact. We continue to see Lam as a dominant force in etch and deposition for chipmaking and believe it is set to benefit from secular trends toward denser and more complex chips over the long term. Shares fell about 5% after the release, in our view due to continued weakness in NAND memory. We see shares as fairly valued.

Fiscal first-quarter sales dropped 31% year over year but rose 9% sequentially to $3.48 billion. Consistent with the previous two quarters, memory weakness—particularly in NAND flash chips—drove the year-over-year decline. NAND sales dipped about 75% year over year, while DRAM sales posted a good rebound from their lows in the fiscal fourth quarter of last year. Along with rebounding DRAM revenue, sequential growth was helped by continued strong demand out of China for lagging-edge equipment from Lam. This has been a common phenomenon across WFE firms, as Chinese customers build up equipment out of fear of stricter future U.S. restrictions.

GAAP gross margin of 47.5% rose more than 100 basis points year over year and more than 200 basis points sequentially, primarily behind a strong mix of lagging-edge sales into China and a higher DRAM mix.

Lam’s fiscal second-quarter guidance implies sequential sales growth, which we view as positive, and modest margin pressure. Lam expects moderating China sales to weigh on gross margins, while ramping up new research and development investments may add to operating margin pressure throughout fiscal 2024.