Lam Research Q1 results impress analysts, but questions over China remain

First-quarter results from Lam Research (NASDAQ:LRCX) impressed Wall Street, as the chip equipment maker topped estimates and offered up strong guidance. While certain areas of the semiconductor market are strong, there are concerns about others, as well as the company’s exposure to China.

Lam shares rose 6% in premarket trading on Thursday, while other chip equipment makers, like Applied Materials (AMAT), KLA Corp. (KLAC) and ASML (ASML) saw gains between 1.5% and 4%.

Susquehanna analyst Mehdi Hosseini, who has a Neutral rating on Lam Research, said the strong quarterly results and guidance were expected, citing leading-edge logic and investment in high-bandwidth memory from Micron (MU) and SK Hynix. However, concerns about Samsung’s (OTCPK:SSNLF) delayed investment in memory and trailing edge logic inside and outside of China could be an issue for some time.

Jefferies analyst Blayne Curtis echoed those sentiments, as the numbers were seen as “solid,” despite the weak China outlook, challenges tied to Samsung and Intel (INTC), and concerns about a recovery in NAND.

“LRCX acknowledged the China headwinds but offered a much more positive outlook for NAND on the back of technology transitions,” Curtis wrote. “Better results and guide were better than sentiment that dropped significantly after ASML’s order miss. We believe some of the delta is related to the difference in lead times, but clearly China is softer and that will continue to weigh on sentiment.”

Curtis has a Buy rating on Lam Research, but lowered his price target to $95 from $110.

China headwinds

The wafer fab equipment market in China seems to be getting worse, as revenue as a percentage of total sales are expected to decline to 30% in the coming quarter, down from 37% in the just reported period, Curtis said.

Morgan Stanley analyst Joseph Moore noted that the China declines have been offset by strength elsewhere, but at this point, it’s “hard to escape questions on China,” given the continued export restrictions and the pending annual revision to U.S. Commerce Department export controls.

“It is our understanding that some of the broad brush strokes of the rules have been conveyed to companies, and in that context Lam’s description of modest declines next year is encouraging, particularly relative to ASML … talking about China declining to 20% of revenue from 47% in the SepQ,” Moore, who has an Equal-Weight rating and $76 price target on Lam Research, wrote in a note.

“That said, the US approach – reportedly more focused on entity list additions than rules based constraints – still adds quite a bit of variance to the outcomes, as we don’t get a clear sense of entity list criteria,” Moore added. “We also don’t know if the election outcome could impact the resolve to follow through. So this remains a significant variable.”