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Hey everybody.
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Welcome back to Chip Stock Investor.
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We're going to be talking about one of our
fab five companies today, Lam research.
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We'll be talking about
these three key points.
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We'll discuss the December, 2024
quarter and the 2025 outlook
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that Lam research gave us.
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And then we'll discuss how some
of the companies in the fab five
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are leaving their home turf.
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What does that mean exactly?
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We'll discuss it.
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And we'll do an updated reverse
discounted cashflow for LAM Research
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and talk about what we're doing
for our portfolio personally.
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Just a brief refresh before we get into
the latest quarter from LAM Research.
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LAM, part of the Fab Five, which includes
ASML, Applied Materials, of course, LAM
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Research, Tokyo Electron, and KLA Corp.
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All participate in the wafer fab packaging
and assembly equipment providers.
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Collectively, we call them the fab
five because they control about 70
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percent of the revenue in this sub
segment of the semiconductor industry
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supply chain and industry flow.
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Here's a chart from semi.
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org on the expected ramp up of semi fab
equipment sales this year and into 2026.
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You can see that represented
in the blue bar in this chart.
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Semi.
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org doesn't expect a huge growth
in fab equipment this year, but it
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does expect acceleration in 2026.
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This expectation really goes along
with the U shaped recovery that we've
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been discussing in other parts of the
semiconductor supply chain as well.
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Basically, the first half of 2025 will
be a bit lackluster for industry sales
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overall, but it will start to heat
up in the second half of the year.
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And Lam research is management just
doused a little bit of cold water on
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that expectation, especially for the
first half of calendar year 2025.
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They updated their expectations
for total wafer fab equipment
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spending for this year.
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And so they expect it to be maybe about a
hundred to 105 billion dollars this year.
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So maybe a couple billion
less than what semi.
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org previous outlook was.
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Part of this is you can blame new US
restrictions on equipment sales to China.
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And Lam got hit with this as well
within their CSBG or customer
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service business group, which we'll
be discussing in a bit more detail
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here momentarily.
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They report some, old legacy
tool sales to Chinese chip fabs.
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Now, previously, most of the
export controls had been on leading
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edge equipment to try to hobble
China's expansion and ability
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to create their own AI chips.
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But now, some of those restrictions also
extending to older equipment as well.
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Things are getting weird out
there with this, but this is
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the reality of things right now.
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Lam getting hit a bit by
those new export controls.
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We'll keep you up to date if we see
anything worth calling out going forward.
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Okay, back to our episode, Lam has
been busy rebuilding its sales on a
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sequential basis for almost two years.
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Now, based on the midpoint of guidance for
Q1, we can expect another modest 6 percent
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quarter over quarter increase in revenue.
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You can see that highlighted in the yellow
bars on our chart here, and then operating
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margin, which is an orange, both on a gap
basis and an adjusted basis should also
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increase a bit sequentially from that
long term cost optimization initiatives
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that management has put in place.
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Yeah, this is modest, but
more than respectable.
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And is the reason why we chose LAM
as, I guess we could say, our new long
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term bet on the memory chip market.
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So we've discussed that multiple
times in past videos in 2024.
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We'll link those for you if
you're interested in learning
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more about that, but we'll come
back to this late in the video
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when we do our reverse DCF, we're
expecting something like a mid teens
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or high teens percentage growth rate in
earnings per share for 2025, driven by
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that steady increase in revenue and profit
margin stabilization, or a bit of profit
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margin expansion as 2025 progresses.
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Now, Kasey, let's talk about this
CSBG, or we have it highlighted in
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pink, customer support related revenue.
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LAM is going to see some headwinds
in this segment because of the loss
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of customers in China, but LAM does
have some unique things happening
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in the customer service segment.
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Before we talk more about LAM,
let's look at, for comparison's
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sake, Applied Materials, Applied
Global Services, or AGS segment.
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LAM service segment
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is 40 percent of revenue last quarter to
about 23 percent for Applied Materials.
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And a lot going on in CSBG again,
last year, we talked about one of the
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services they provide is helping their
customers move existing equipment
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around the fab and repurpose it
for a different manufacturing line.
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For example, let's say your Micron
or SK hynix, Casey put together some
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great research on SK hynix last week,
if you haven't caught that video.
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Check it out.
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We also did Micron back in December,
of course, after their latest earnings.
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But both of those companies have been
talking about moving some of their old
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equipment that is used in DRAM and moving
it to high bandwidth memory production,
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HBM, for accelerators and AI chips.
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LAM is going to sell some new equipment
for HBM, but a lot of existing equipment
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can be repurposed for that HBM, and
LAM still earns some revenue by helping
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those customers move that equipment
around to those new manufacturing lines.
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Good stuff.
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This time around, let's talk
about two new innovations.
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Kasey mentioned point number
two, some of the fab five.
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In this case, we'll talk about Lam,
breaking out of their home turf way
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for fab equipment into new areas.
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And there's two things that are
bundled up in CSBG at Lam, that
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we think are worth calling out.
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We'll talk about semi verse
solutions and that little robotic
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arm that you see in under CSBG.
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Let's first focus on semi
verse software solutions.
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This may call to mind NVIDIA's
Omniverse, which creates 3D graphics
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and digital twin simulation software
used to build things virtually
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before building them in real life.
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LAM's two products, the Simulator 3D and
OverViz, may have used NVIDIA's Omniverse
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to produce these software applications.
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On the left, Simulator 3D.
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This was designed to help early on
in the development process for a new
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Semiconductor manufacturing process.
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As the technology and manufacturing
of semiconductors gets more complex
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and expensive, this tool can help
create a virtual design of what the
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microscopic 3D structures on a silicon
wafer would look like after running them
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through a new manufacturing process.
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Obviously a very important tool that
could help with efficiency and cost.
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Yeah, absolutely.
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Related to this, OverVis, this is a
plasma physics simulation software suite.
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So plasma, the fourth state of matter
used in various steps of the wafer
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manufacturing process, everything
from deposition to certain types
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of dry etching ion implantation.
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So OverVis helps with solving some
of the complex physics problems
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that are involved with using plasma
in the manufacturing process.
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So this might remind you a little bit of
Synopsys's pending acquisition of Ansys.
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Or Cadence Design, making some
similar acquisitions in the last
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year, EDA software providers getting
into the physics simulation game.
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This is a hot part of the
manufacturing industry right now.
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Being able to simulate something before
you actually manufacture it has massive
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potential to save you in operating costs.
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So Lam research very much
wanting to get in on this game.
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It has the equipment to be able to do it.
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So why not just add in
this layer of software?
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The other big innovation happening
at LAM research, we can focus
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on that little robotic arm.
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There's so many challenges to
getting talent into operate
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these manufacturing facilities.
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Talent that is possibly not
readily available to recruit.
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That's a challenge that Taiwan
Semiconductor Manufacturing is
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having in Arizona, for example.
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That's why Lam has introduced this little
robotic arm or a co bot named Dextro.
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And you can see Dextro performing various
functions in a chip fab, not supposed
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to replace the humans, but maybe.
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More like helping the humans get
more done in the same amount of time.
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We're not sure that we're there yet
for humanoid robots being able to walk
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around a chip fab and not be supervised.
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So, you know, that's maybe good news
if you're worried about robots taking
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over and becoming our overlords.
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But the point here, LAM is probably
sourcing these robotic arms, training
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them to perform these specialized
functions within the FAB, maybe
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developing the assembly at the end of
the arm that actually performs the task.
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And this puts LAM research in
competition with a lot of different
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Robotics companies out there.
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For example, one that came to my mind
was Teradyne, another company that
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participates in the way for fab equipment
on the testing side of the equipment.
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But they have two
robotics segments as well.
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Teradyne acquired Universal Robots
and MiR number of years ago.
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Universal Robots in particular,
being the division that
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that makes things like robotic arms.
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Maybe there's a partnership here
going on between Lam and paradigm.
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Maybe Lam is getting the robotic
arms from somewhere else.
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We don't know.
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We have some folks over on semi insider
that had pointed this out and brought
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this to our attention that perhaps
Lam is sourcing these from someone.
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So if you want to hang out with a
great community of long term minded
00:12:00
business owners, check out semi insider.
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Link to that right here in the video.
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The point of all this is to say
that Lam is not a one trick pony.
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They're breaking out of their
equipment routes and moving into
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other directions, including into
market tech equipment and devices.
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So be it enterprise software, robotics, or
something else, LAM has optionality built
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in with a very solid balance sheet and
more net cash flowing in every quarter.
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In fact, management said that
it's going to be paying off the
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500 million in debt that matures
this year with some of that cash.
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Yeah, their free cash flow positive
had remained free cash flow positive,
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throughout the bear market and
now coming out of the bear market,
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entering a new phase of growth, LAM is
doing quite okay on that department.
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Optionality, a big deal
here for these companies.
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Okay, time to talk about our final point.
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Let's do an updated reverse
DCF on LAM Research.
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On the surface, if you're just looking
at trailing 12 month Price to earnings or
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trailing 12 month price to free cashflow.
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You may see Lam Research and
think there's no great value here.
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in fact, you could possibly still at this
point, make a decent argument that the
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stock is a bit on the high end, maybe even
entering premium territory, even after
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a pretty sizable sell off last second
half of last year, as reality settled in
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that, memory chips weren't going to just
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somehow infinitely scale,
along with the AI industry.
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But let's go a little bit deeper here.
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We're going to do a reverse
DCF emphasis on reverse.
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This is not a straight line
DCF based on our estimates.
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Remember a reverse DCF is one
scenario that we've landed on that
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we think the market has baked into
expectations right now that makes Lam
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Research stock a good value today.
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Remember not our expectations.
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One scenario of expectations that
Wall Street has baked into the stock
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price today to make it fair value.
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Actually, Nick, not much has changed
since our October reverse DCF estimate,
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but here's our updated numbers trailing
12 months earnings per share of 3.
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29. That's using December
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GAAP earnings per share on a
stock split adjusted basis.
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For earnings per share growth
rate, we put 20% in for two years.
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That's about the growth rate that
we can expect from management.
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Terminal growth rate of 4.5%,
discount rate of 10% gets us to around
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$82 per share for the fair value.
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Now, do we think this is reasonable
For us personally, we think it is and,
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remember at the beginning of this
video, we showed you that semi.
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org outlook, where we have
that U shaped recovery in 2025.
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Growth being a bit muted, at least through
the first half of this calendar year
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before maybe heating up a bit the second
half of the year, and then expectations
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for a very widespread new record
sales for companies like LAM in 2026.
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Remember, there's new fabs being built
all over the world right now, and
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eventually, when the buildings are
finished and the companies have the
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orders from customers to warrant doing
the next step, they're going to buy new
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equipment from LAM and fill up those
fabs and start cranking out new chips.
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So that's where the heat up in revenue
is expected in 2026 from a lot of
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new fabs and fab updates taking place
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over the course of the next two years.
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And that's where we are pulling this
earnings per share growth rate of 20%.
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Now the terminal rate of four and a
half percent, to us, that seems low, but
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reasonable because at some point Lam is
a cyclical business, there is going to be
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a cyclical downturn for their sales after
this current phase of growth Peters out.
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We think four and a half percent is
fairly conservative, but it does bake
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in an expected downturn, maybe in three
years out from now, maybe sooner, maybe
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later too soon to tell, obviously,
we're a long ways away from 2027.
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So that's where these numbers came
from to arrive at that fair value.
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For us,
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we think that.
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Is a reasonable expectation
for LAM research.
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And so we still like this stock.
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We're happy to continue holding this
one and glad that we made an exception.
00:16:38
With this one, when purchasing fab
five stocks in 2024, but we are warming
00:16:43
up to the fab five again in 2025.
00:16:46
If you want to get more up to date
information on what we're adding to our
00:16:49
portfolio and more importantly, the why
check out semiconductor insider link
00:16:54
in the video description below gets
you access to our Discord server with
00:16:59
a great community, as well as all of
our show notes and research over there.
00:17:04
See you all again soon
at Chip Stock Investor.
