Lam Research: Premium Analysis

By: Beth Kindig

Date: March 31st, 2020

2020 Disclosure: The information contained herein is analysis on tech companies and
tech products. The pricing information are opinions and not financial advice.
Please consult your paid financial advisor before investing in any stock.
Stock transactions can lead to losses as a result of price fluctuations and other factors.
This analysis cannot be reproduced or leveraged for commercial
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Beth Kindig, San Francisco, CA Beth.Technology
Lam Research 03-31-2020

DISCLAIMER:

This analysis cannot be reproduced or leveraged for commercial

purposes and is intended for the recipient only.

The report, or any portion of the report, may not be reproduced, distributed
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Email: analysis@beth.technology for more information

The information contained herein is analysis on tech companies and

tech products. The pricing information are opinions and not financial advice.
Please consult your paid financial advisor before investing in any stock.
Stock transactions can lead to losses as a result of price fluctuations and other
factors.

Beth.Technology, San Francisco, CA Page | 2

Lam Research 03-31-2020

Lam Research

Introduction:

Lam Research is cash efficient with forward guidance that shows earnings will grow at a rate that is rare to see in
the semiconductor space. There is a 1.5% dividend, an exceptional buyback schedule and adjusted forward
earnings per share of $20.34 for FY 2021, up from $16.05 for FY 2020. The $4 EPS increase in adjusted forward
earnings in 2021 alone is more than Nvidia, Qualcomm, Taiwan Semiconductor, AMD or Qorvo’s respective EPS.

Lam Research’s forward EPS is nearly double Broadcom, in second place.

Lam Research has best-of-class etch processing equipment. The majority of its revenue comes from supplying
NAND and DRAM memory manufacturing. The company provides micro-processors, memory devices, various
processing solutions and fabrication equipment for semiconductor companies.

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Lam Research 03-31-2020

Front-end wafer processing solutions from Lam Research help to create chips and applications for edge devices.
Wafer processing create transistors, capacitors and wiring for semiconductors.

Lam Research’s customers span across Micron, Samsung and Intel. Analysts covering Lam Research like to point
out that the company is protected from supply and demand as memory manufacturers will continue to buy from
Lam Research even during a low point in the cycle. This was proven during 2015 when Lam Research did not feel
the effects of the memory trough.

With that said, Lam Research is not entirely immune to supply chain issues as fiscal 2018 to fiscal 2019 reported
a 13% decline.

Financials:

The company released its Q2 fiscal year 2020 results on January 29, 2020. Revenues grew 2.41% to $2.58 billion
with trailing twelve-month revenue at $9.55 billion. This is slightly lower than FY 2019 revenue reported in the
quarter ending in June with Lam Research’s fiscal year beginning July 1st.

Net income fell 11% year-over-year to $514.5 million in Q2. Earnings per share were $3.43 compared to $3.09 for
the previous quarter and $3.51 for the same period last year. Adjusted earnings per share came in at $4.01
compared to $3.18 in the previous quarter.

Historically, revenue grew 18% from fiscal 2016 to fiscal 2019 although declined in 2018 due to trade war issues.

Gross margins are at 45.7% compared to 45.3% in the 1Q FY 2020, which is average for a semiconductor company.
The company has cash and cash equivalents of $3.03 billion at the end of the Q2 compared to $4.6 billion at the
end of the Q1. The company reported cash and cash equivalents and investments of $4.9 billion compared to $5.8
billion at the end of Q1.

This was due due to $1.0 billion of share repurchases, dividend payment of $166.7 million and capital expenditure
of $62.1 million. These outflows were partially offset by $307.9 million of cash generated from operating activities.

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Lam Research 03-31-2020

The company has long-term debt of $4.4 billion with current debt of $667 million. The operating cash flows were
$307.9 million in fiscal Q2 2020 compared to $464 million in Q1 2020 and $642.4 million in Q4 2019.

Forward Guidance

The median revenue forecast for fiscal 2020 was $10.23 billion for an increase of 5.7% and $11.87 billion for fiscal
2021 beginning in July. However, the company recently withdrew financial guidance for Q3 2020 due to the
company being located in California where non-essential companies have “shelter in place” restrictions.

According to the recent investors day presentation, the company expects revenue to reach $14.5 billion to $15.5
billion for 2023/2024. This assumes a water fab equipment market assumption of $60 billion up from a market of
$46 to $47 billion in the current year. If the market is more bullish by this time frame, the addressable market
estimate for WFE is $70 billion with Lam Research’s revenue at $17 billion and EPS of $36.

The company also announced that it will return 75% to 100% of Lam Research’s free cash to investors, up from a
previous target of 50%, and will also boost its dividend each year. Please note, this was stated at the start of the
coronavirus disruption and prior to California’s closure of nonessential businesses.

According to the earnings call, NAND demand is expected to be strong in calendar year 2020. The company expects
to see growth in water fab equipment of $8 billion to $10 billion this year due to strong spending in foundry/logic
(over memory). The company stated early signs of improvement in NAND spending with DRAM more in the long-
term.

Services growth will be important to watch in the next quarter and into the future. According to management on
the earnings call, services grew 30% year-over-year with multi-year contracts that provide recurring revenue to
the company. The expectation is that services will outgrow the installed base with growth of 10-11% year-over-
year.

The company’s decision to buy Novellus Systems for $3.3 billion in 2011 helped the company to gain a leading
position in the deposition segment. More recently in the earnings call it’s mentioned that the atomic layer
deposition (ALD) is another area of growth. The company is gaining market share because of best-in-class film
properties along with hyperactivity and low defects.

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Lam Research 03-31-2020

Valuation:

Lam Research has a more attractive valuation a month ago as the price is down 25% from the Febuary peak.
However, it’s important to note this was more of a reversion to the mean rather than a deep discount as Lam
Research is now trading at its 5-year average across nearly all valuation metrics.

Click here to view spreadsheet.

What I like about Lam Research is its cash flow and also the company’s cash on hand relative to annual revenue.

Applied Materials reported $14.6 billion in revenue last year yet similar cash reserves of $3 billion as Lam Research
with $9.6 billion revenue. The 5-year free cash flow growth rate for Lam Research is 38.12% compared to Applied
Materials at 12.47%.

The 5-year free cash flow growth rate for KLA is 7.52%. This is a significant spread on free cash flow and the
comparables.

Notably, Lam Research has higher forward revenue estimates of 17% compared to AMAT at 13.45% and KLA at
10.59%. When averaged over the next two years, Lam Research has similar revenue to both comparables.

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Lam Research 03-31-2020

Earnings are similar across Lam Research and Applied Materials, although when you add in shares outstanding,
Lam Research is set apart with 160 million shares compared to Applied Material at 945 million shares, which
results in a much higher EPS for Lam Research.

This, in turn, will allow Lam Research to do more buybacks and pay a dividend, which will attract a wide range of
investors (value investors for the free cash flow, dividend investors for income, and growth investors for the
memory market, stability from equipment sales and few competitors on etch).

It’s anyone’s guess as to what exactly the market has priced in with the Coronavirus as the company has not issued
a revised guidance at this time other than to withdraw its current guidance (see below).
Due to global economic conditions, the headquarters being shut down, and uncertainty in demand for NAND,
some discount from the five-year average would be ideal.

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Lam Research 03-31-2020

During the trade war, Lam Research traded at a PE ratio of around 10 and during the Q4 2018 selloff, the stock
traded around PE ratio of 9. We have yet to see Lam Research trade at these levels during the Coronavirus/March
bear market as it’s remained at a PE ratio of 13 or above. With that said, a forward PE ratio at 9 would be
reasonable when comparing the last two sell-offs in tech and semiconductors.

When looking at EV/EBIT, Lam has also remained above its Q4 2018 selloff and China trade war valuations.

Some of the hardiness we are seeing in semiconductors during the March lows reflects the fact that a pricing surge
was expected this year, yet as noted below, analysts and manufacturers are mixed on whether this will occur now
due to a lack in demand (not supply).

The majority believe the pricing surge will be much softer than previously estimated to flat while Gartner is calling
for 10-15% increases in pricing (see below).

COVID-19 Impact

Multiple San Francisco bay area counties issued shelter-in-place order. The company needs to temporarily stop
on-site work at its Fremont and Livermore locations for three weeks effective March 17, 2020. As a result of these
implications the company’s manufacturing activities in the two California facilities will be disrupted and parts from
key suppliers will be impacted. The company has withdrawn the March quarter 2020 financial guidance.

The company also has supply chain activities in Malaysia, and on March 16, 2020, the Malaysian government
issued orders to close certain business activities from March 18 to March 31, 2020.

Lam Research saw a 43% drawdown from its February peak and is currently trading down 24%. Meanwhile,
analysts are mixed on the semiconductor market recovery following COVID-19 shutdowns.

On March 20th, Mizuho analyst Vijay Rakesh upgraded the stock from neutral to buy. Rakesh expects a rebound
in the second half of 2020 and into 2021 based on the expectation for growth in NAND, DRAM, and etch-
equipment spending. The analyst mentions valuation is cheap compared to the historical average.

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Lam Research 03-31-2020

Regarding COVID-19 Rakesh states, “While (first half of 2020) wafer-equipment spending will likely be impacted
from COVID-19, we see a better (second half 2020) by the need to add capacity to tight memory supply, and
foundry/logic WFE spending given strong seasonal 5G handset demand, a strong data center outlook and 7-
nanometer/5-nanometer ramps.”

Evercore names Nvidia, Lam Research, and ASML as top ideas for long-term investors amid the “incredibly
uncertain” demand picture. Meanwhile, B.Riley analyst Craig Ellis downgraded the 10 chips companies, writing
that he “underestimated potential for a risk” from outbreak of COVID-19.

Morgan Stanley analyst says that the company’s analyst day featured “several incremental positives,” including a
strong earnings target and a higher FCF return plan. The firm sees Lam Research as a core holding, but “can see
more upside elsewhere around the theme of memory improvement.” (Note: is likely this analyst is referring to
Micron as Morgan Stanley is bullish on Micron).

Addressable Market and Valuation

According to Gartner the worldwide wafer fab equipment market is expected to reach $53.6 billion in 2020, down
1% from 2019. According to the March Investors presentation, Lam Research has outperformed water fab
equipment (WFE) growth 2:1. Lam Research’s revenue grew at a CAGR of 16% from 2013 to 2019 and WFE grew
at a CAGR of 8% in the same period.

Lam Research’s customer list includes Micron Technology, Samsung Electronics, SK Hynix, Toshiba, TSMC, among
others. In 2019, Lam Research was also named a preferred supplier for Intel.

Geographically, Lam Research is weighted towards China at 29% and Taiwan at 26%. The United States makes up
9% of Lam Research’s revenue.

NAND is primarily driven by smartphones, including SSD and memory cards. The global 3D NAND flash memory
drive market size was $9 billion in 2017 and is projected to reach $99 billion by 2025, growing at a CAGR of 35.3%.
Asia-Pacific will be a strong contributor to global share at nearly half of the market at $48 billion. Key players for
NAND include Samsung Electronics Co., Ltd., Toshiba Corporation, SK Hynix Semiconductor, Inc., Micron
Technology, Inc., Intel Corporation, Apple Inc., Lenovo Group Ltd., Advanced Micro Devices, STMicroelectronics,
and SanDisk Corporation.

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Lam Research 03-31-2020

Statista places the size of the dynamic random-access memory market worldwide at $63.5 billion in the current
year, growing to $83.4 billion by 2024. DRAM memory is used in smartphones and tablets and the increasing
demand for online operability and internet connectivity.

Low-power consumption and high-density memory technologies, such as DRAM, are also used in data center
infrastructure due to cloud services requiring cooling, high speed data transmission and back-up facilities.

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Lam Research 03-31-2020

According to IC Insights, NAND Flash sales declined 27% in 2019 and will rebound at 19% in 2020. DRAM sales
declined 37% in 2019 and will rebound 12% in 2020.

Source: IC Insights

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Lam Research 03-31-2020

However, COVID-19 shutdowns may soften the pricing surge that was beginning to form due to demand. The
weakened forecast comes from an uncertainty in consumer spending on mobile phones and devices that use
chips. If major hyperscalers curb their spending in the second half, as discussed by TechTarget, then flash and
SSDs will be impacted. Others agree that there’s unlikely to be shortage this year in memory and that NAND flash,
SSDs and DRAM should remain at a reasonable price. In contrast, Gartner continues to believe NAND flash will
see a 10-15% increase in pricing with SSD prices likely higher.

Product Overview

Lam Research manufactures equipment for semiconductor companies. The company serves the etch, deposition
and clean markets with a specialty in 3D NAND flash and advanced DRAM.

As the market leader in etch, Lam Research supplies a critical process in chipmaking where excess material is
removed. Lam Research also produces deposition equipment, which applies thin-film layers to surfaces.

This month, the company announced the Sense.i platform, which has a space-saving architecture and will help
customers meet wafer output targets “by producing more than 50% improvement in etch output density.” The
company describes the platform as self-aware due to autonomous calibration that helps reduce downtime and
labor costs while the tool self-adapts to maximize wafer output. The platform also has a small footprint, which
helps as manufacturers increase the complexity of their processes.

The majority of its revenue comes from supplying NAND and DRAM memory manufacturing. The company
provides micro-processors, memory devices, various processing solutions and fabrication equipment for
semiconductor companies.

NAND memory saves data even when the power is removed, like when a cell phone is turned off. DRAM only
saves memory when a device has power but is much faster than NAND and lasts longer. Beyond mobile devices,
NAND is found in traffic lights, digital advertising panels/displays, and anything with artificial intelligence that
needs to store data. NAND has been around since the 1980s but got a much-needed boost from 3D NAND, which
stacks vertical memory chips. I’ll cover 3D NAND in more detail in the upcoming Micron research report.

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Lam Research 03-31-2020

Catalysts for Lam Research include FinFET and planar for 3D NAND with multiple patterning and vertical layers.
3D NAND spans single-level cell (SLC), multi-level cell (MLC) and triple-level cell (TLC). As chipmakers must battle
each other for more power per chip while often in pricing wars, equipment providers like Lam Research can
provide an advantage through superior tools. There are more layer-counts in 3D NAND and foundry/logic
transitions to the process node that require greater multiple patterning steps. Upgrades from the planar to 3D
NAND have been strong drivers for Lam Research’s double-digit revenue growth although these upgrades may
level off in the future.

For Lam Research’s customers, Moore’s Law states that the number of transistors on a microchip doubles every
two years although the cost of computers is halved. Superior equipment providers (like Lam Research) can help
stave off the effects of Moore’s Law for their customers by helping to deliver high-volume manufacturing.

The competitive advantage for Lam Research is the lead it has from service contracts and customer collaboration
for high-volume manufacturing. It would be challenging for new competitors to compete with the scale and
resources that Lam Research has. Lam Research has an installed base of 61,000 chambers as of the end of
December 2019, up from 40,000 units in 2015. The company is also driving more revenue per chamber. New
technologies like “Sense.i” deliver significant productivity and throughput improvements. The tool will be
delivered to all major customers to increase manufacturing rates.

Lam Research merged with Novellus in a $3.3 billion stock deal in 2012 to become a market leader in deposition
materials. In 2016, an attempt to merge with KLA-Tencor was shot down.

Lam Research is also releasing an advanced atomic layer deposition (ALD) tool as well as a plan to introduce dry
photoresists for EUV patterning in lieu of the current wet photoresists. The ALD-tool will target companies such
as ADM International and Applied Materials for physical/chemical vapor deposition.

TSMC has mentioned that the 5G and HPC are the growth drivers in the long-term. This should also help the
company to diversify from any slowdown in memory chip clients.

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Lam Research 03-31-2020

Technical Analysis
By Knox Ridley

Elliott Wave/Fibonacci Price Zones (Weekly Chart)

The above chart is my Elliott Wave count for LRCV going looking back to 2009. All Elliott Wave charts are meant
to be analyzed on the logarithmic charts, which is why the trend looks more balanced. It’s measuring the
percentage change in a stock.

I have LRCV ending a large degree third wave, in blue, and currently in the 4th wave down. Fourth waves typically
retrace to the 23.6% to 38.6% retracement level of the entire 3rd wave. On rare occasions we see it retrace to the
50% retracement level. These levels are outlined in black to the right of the green target box.

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Lam Research 03-31-2020

The red, blue and black prices on the right of the chart correlate to the larger degree counts. What we want to
see are confluences of price clusters. When we see this intersection, it usually marks an important region for
support/resistance. These typically act as magnets to the price above and can usually be counted as great areas
to either layer in or look for a bottom.

Basic Technical Analysis (Hourly Chart)

If we zoom into the hourly chart we can get a better idea of where this correction may bottom. Corrections
typically unfold in 3 legs that are symmetrical (in Elliott Wave it’s marked as A,B,C). In other words, more times
than not, the length of the first leg is usually the length of the last leg down.

In the chart above, this symmetrical leg down is shown by the 100% extension in black, which is to the left of the
target box. This area also coincides with a number of Fibonacci price clusters, which is shown on the right of the
target box.

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Lam Research 03-31-2020

The areas where we will focus is the yellow and green bands. The yellow band consists of the $174 - $161 region,
which coincides with two Fibonacci price clusters as well as the 1/2 Gann Fan. The green band consists of $135
region which is the 100% extension of the first leg down as well as some major price clusters

Also, the B wave that we are in shows many divergences, which suggests this rally is running on fumes. We have
multiple negative reversal patterns, where the RSI and MACD are making higher highs while the price is making a
lower low. This is saying that a larger amount of buying pressure is needed to push the stock up to a lower price
than before. The volume is also suggesting that this rally isn’t widely being bought either.

Putting it Together

The above chart combines the Fibonacci price clusters in black, on the right of the chart, and the Gann Fan angles.
One thing becomes evident, the $174 region is an intersection between the Gann Angle 1/2, and the Fibonacci
price cluster.

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Lam Research 03-31-2020

I’d look for the $174 area to act as support in the coming days/weeks. It would also be a good level to start layering
in, for anyone with a long-term time frame in mind.

If the price can close above $288 and sustain above that level, then I consider that a cautious bullish scenario. I’ll
consider entering with very tight stops.

I will update you when we approach one of these two scenarios.

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