Lam research riding the wave of semiconductor luau – lam research corporation (nasdaq lrcx) seeking alpha 1 unit electricity price india


Shares of California-based Lam Research Corporation (NASDAQ: LRCX) have experienced an unprecedented rally over the past few years, primarily due to increased demand in the semiconductor space. As the industry demand is expected to remain strong in the upcoming years due to new advances in technology such as interconnected autonomous vehicles or rapidly-growing robotics applications that will require a lot of new computing power, Lam Research’s rally is likely just at its early growth stage. Corporate profile & history

Lam Research Corporation has a very alluring story. Lam Research has emerged from the middle of a recession in the early 1980s. Founded by David K. Lam, a Chinese-born engineer with work experiences from Xerox (NYSE: XRX), Hewlett-Packard (NYSE: HPQ) and Texas Instruments (NYSE: TXN), in assistance with Robert Noyce, the founder of Intel (NASDAQ: INTC) and MIT postgrad, Lam Research quickly established presence all over the world, particularly in markets such as China, Korea, Singapore, and Taiwan.

Currently, the company operates in seven geographic regions and one reportable business segment – manufacturing and servicing of wafer processing semiconductor manufacturing equipment. The company supplies its products to leading non-volatile memory, DRAM memory, and logic devices manufacturers such as Micron Technology (NASDAQ: MU), Samsung Electronics ( OTC:SSNLF) or Toshiba ( OTCPK:TOSYY). Solid fundamentals

Lam Research’s track record of its fundamentals is also quite impressive. As calculated by Reuters, the company’s one-year, three-year and five-year revenue growth reaches 36, 20 and 24 percent respectively. Likewise, the compound annualized growth rate of trailing twelve months earnings per share comes at 77, 37 and 47 percent respectively. This is significantly above the greater majority of all Nasdaq-listed companies and most semiconductor peers.

Over the past five years, outstanding development with respect to Lam Research’s financial metrics has been also recorded in ROE, which has gradually surged from levels slightly above zero to its current levels around 27 percent, driven by increases in all three of its components – net profit margin, asset turnover and financial leverage multiplier. The past growth has been fueled primarily by expanding demand for computing power and the company’s preparedness in terms of increased capital expenditures.

Looking at the revenue and earnings growth rates from the most recent year and comparing them with their long-term counterparts, one quickly recognizes a building business momentum. As highlighted by the company’s CEO during the latest earnings presentation call, the deployment of 5G networks will require nearly 2x the DRAM contents in smartphones relative to the current global average. This can be expected to propel Lam Research’s business and break through any existing limitations.

”In only the 24-month period ending December 2018, we expect Lam shipments in these segments to grow 2x faster than the pace of the underlying foundry logic WFE. In short, we feel that’s the historic strength of Lam has never been more valuable.” – Martin Anstice, CEO Asian crypto farms driving the demand for microchips

Besides the above-mentioned arrival of the new generation of networks, another possible explanation of Lam Research’s overall business acceleration lies in the recent crypto mania all around the world. As contemporary research shows bitcoin and other cryptocurrencies mining requires vast amounts of energy which appears to be unsustainable in the long run.

To put this into context, the annual electricity usage of the Bitcoin network is currently estimated to be around 26TWh, which is almost 18 times greater than the annual electricity usage of Apple Inc. (NASDAQ: AAPL), 3.6 times greater than the annual electricity usage of Amazon (NASDAQ: AMZN) and roughly equal to the annual electricity usage of some states such as Nigeria. As in the case of all other crowd delusions in the history, the businesses that made the most money were those which supplied the needed accessories and equipment, not those who actively participated by betting on the craze.

Over the last two years, the company’s Board of Directors authorized two separate buyback programmes with the aggregate nominal repurchase value of 1.5 billion U.S. dollars. This is a clear positive signal testifying Lam Research’s shareholder-friendly corporate governance and commitment to shareholder long-term wealth maximization.

According to my simple DCF blended model, Lam Research Corporation’s shares are currently trading with more than 80 percent upside potential. Under the perpetuity growth method, fair value of the stock is US$354, assuming 25 percent annual revenue growth over the next five years, incrementally improving EBIT margin of 24 percent (each year by 0.5 percent) and terminal growth rate in perpetuity of 2 percent. Under the EBITDA multiple approach, the intrinsic value stands at roughly US$384 if we assume that the appropriate exit EV/EBITDA multiple is around 10x.

Based on Peter Lynch earnings line, a famous valuation technique that helped the legendary investor to achieve an annualized rate of return of 29 percent, the best 20-year return rate of any mutual fund in history, Lam Research’s shares seem to be currently considerably undervalued. Using the Fast Graphs forecasting calculator with a consensual 19.3 percent operating earnings growth assumption, the company’s intrinsic value by mid FY2023 is forecasted to reach US$555, which implies over 20 percent total annualized rate of return upside potential.

• Historically, the semiconductor industry has been a highly variable and competitive environment, subject to periods of rapid growth or decline in demand. The company’s primary competitor in several lines of business is Applied Materials (NASDAQ: AMAT), one decade older, $20 billion bigger, slightly less-leveraged semiconductor manufacturing equipment player with a marginally higher revenue per employee. Other competitors include companies such as ASM International ( OTCQX:ASMIY), Wonik IPS or Tokyo Electron ( OTCPK:TOELY).

• The company has a limited number of key customers which constitute a significant portion of its overall revenue, cash flows and profitability. In fiscal 2017, the company had five customers which each accounted for more than 10 percent of total revenues – Micron Technology, Inc., Samsung Electronics Company, Ltd., SK Hynix Inc., Taiwan Semiconductor Manufacturing Company, Ltd (NYSE: TSM), and Toshiba, Inc. (TOSSY).

• The company is making considerable investments in R&D because it is highly dependent on the creation of new products and processes and enhancement of the existing ones and therefore is subject to risks associated with rapid technological change.

In conclusion, Lam Research is an exceptional semiconductor company with a compelling story and outstanding fundamental track record. Plugging in the company’s financial statement figures into my two favorite valuation models – Peter Lynch’s price-earnings correlation line and Perpetuity Growth and EBITDA multiple DCF model – I discovered that Lam Research’s shares are currently trading at very attractive price levels. With 5G networks in sight and raging crypto mania, I believe many investors have found, find and will find value in this relatively stable semiconductor business with more than a 35-year operating history. Clearly, Lam Research’s shares are nowhere near their intrinsic value and therefore still have a long way to go.