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The US technology equipment supplier has a great spot in the digital revolution that will require better, faster, cheaper microchips
Thursday 25 Jun 2020 Author: Steven Frazer

As the world increasingly goes digital, anything that can help drive
down the cost of microchips and boost their power should be well-placed. This is a niche market in which Nasdaq-listed Lam Research (LRCX:NDQ) oozes pedigree.

The Silicon Valley-based business designs specialist equipment that helps semiconductor manufacturers improve yields, lower costs, shrink processing time and reduce defects on microchips. Customers include Intel, Toshiba, Samsung and Micron Technology.

Traditionally big in memory chips, this is an area booming thanks to the rapid rise of cloud computing, big data, mobile devices and other connected world applications.

Since data storage is the starting point of the digital economy, there is a huge demand for memory chips, particularly the more efficient variety. But technological advancements in areas like in-car electronics, 3D device architecture and advanced packaging technologies are also playing to Lam’s strengths.

Since 2015, revenues have gone from $4.6 billion to nearly $10 billion, while net income will have jumped nearly 250% to $2.25 billion, if 2020 forecasts are right. Net income is forecast to break the $3 billion mark by 2022.

There are a few risks that investors should note. The semiconductor industry, including equipment suppliers, has always been very cyclical, and with substantial fixed costs, down-swings can hurt profits. That said, we note recent research by McKinsey that points to buoyant industry prospects as the world emerges from lockdown and moves on from the worst of the pandemic.

Intense competition and high customer density are also worth noting. Significant revenue comes from a concentrated list of fabricators, such as those listed above. While this may remain the case going forward, we would expect expansion into new technological product lines to help offset some of this risk, as should its reputation as a tried and trusted technology partner.

It is forecast to end the financial year on 30 June with a $788 million net cash position.

Lam Research should be able to bolster shareholder returns through dividends where it is forecast to pay $4.77 per share in 2021, equal to a 1.5% yield which isn’t bad for a growth business.

The stock is currently trading on a rolling 12-month forward price-to-earnings multiple of 17.9, based on Refinitiv data, versus a 54-times average for semiconductor equipment peers, and at a 26% discount to the wider technology sector’s 24.3-times average.

Narrowing that discount and meeting growth estimates could put a $400 to $450 share price within reach.

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