Lam Research Faces Analyst Scrutiny Over Near-Term Margin and China Demand Uncertainties

Lam Research Corp LRCX reported quarterly earnings of $6.85 per share, which beat the consensus estimate of $6.07. 

The company reported quarterly sales of $3.48 billion, which beat the analyst consensus estimate of $3.41 billion, a 31.38% decrease over sales of $5.07 billion from the same period last year.

B. Riley Securities analyst Craig Ellis maintained Lam Research with a Neutral and raised the price target from $690 to $700.

LRCX reported modest Q1 sales, a more significant EPS upside, and slightly better Q2 guidance. CY23's industry WFE view rose 7% to $80 billion as higher DRAM offset lower Logic and mature foundry outside China, with CY23's sales view unimpacted.

Further, he expects solid CY24 Y/Y industry Etch and Deposition WFE gains. So, while a cyclical bottom now seems behind, shares still eased -5% AMC following a +51% YTD pre-print gain (SOX +34%), with about half that following relatively cautious CY24 gross margin mix and R&D investment and operating margin expansion comments. 

The analyst expects solid LRCX relative Systems and Services growth as spending improves. However, he is now more cautious about the pace of CY24 gross margin and operating margin expansion potential, even as operating cash flow remains strong to fuel active share repurchases and dividend boosts. 

Ellis projects Q2 revenue of $3.70 billion vs. consensus $3.65 billion and EPS of $7.00 vs. consensus $6.79.

Needham analyst Charles Shi reiterated a Buy and a price target of $800.

LRCX reported a beat-and-raise quarter, with Q1 results and Q2 guidance exceeding the consensus estimates. 

The stock nevertheless traded lower, likely reflecting bearish sentiment over LRCX's outsized China exposure in C2H23 and the near-term margin downside due to the company's decision to raise operating expenditure. However, Shi says LRCX's China strength may last beyond C2H24 and at least into Q3, which could maintain LRCX's steady recovery that started in Q1 before a global WFE recovery takes over as the primary growth driver. 

He views LRCX's operating expenditure raise as a positive, as companies rarely boost operating expenses in a weaker environment, and an operating expenditure raise is more likely to signal management's increased confidence in future growth. He will be the buyer on weakness today. 

The analyst projected Q2 revenue of $3.70 billion and EPS of $6.98.

Raymond James analyst Srini Pajjuri reiterated an Outperform. LRCX's Q1 results and Q2 outlook were both slightly better. 

Pajjuri attributed the aftermarket stock reaction (-4.5%) to YTD outperformance, 2024 margin commentary, and concerns regarding the sustainability of China demand. 

The analyst modeled China's demand to moderate in the coming quarters. Pajjuri is optimistic that the worst is behind in Memory and expects LRCX to benefit from cyclical recovery and secular growth in HBM and Advanced Packaging. 

The company's progress in Foundry and Logic has been impressive and sees further gains from GAA and backside power technologies.

Susquehanna analyst Mehdi Hosseini had a Neutral rating and a price target of $615.

Consistent with his preview, Lam's report and guide exceeded consensus expectations. However, the preliminary conservative CY24 WFE outlook with no operating leverage will lead to much lower CY24 consensus estimates. 

Lam is positioned well for much higher earnings power in the next upturn. The increased prospects of two consecutive years of WFE recession would first need to be dialed into consensus and valuation multiples.

Price Action: LRCX shares traded lower by 4.51% at $613.25 on the last check Thursday.