The Ratings Game: Lam Research surges 10% after strong earnings — has stock finally hit a bottom?

by | Oct 21, 2022 | Stock Market

Lam Research Corp. shares rallied Thursday as Wall Street cut their target prices, anticipating a bottom to the stock as the chip equipment maker posted earnings that beat expectations and a strong forecast. Lam
shares, which surged as much as 11% to an intraday high of $366.92, finished up 7.8% at $355.87, for their best one-day performance since March 9, 2021, when they finished up 8.1%. Even with that gain, Lam Research shares are down 51% year-to-date, compared with a 43% drop in the PHLX Semiconductor Index 
  a 23% decline by the S&P 500 index 
 and a 32% fall in the tech-heavy Nasdaq Composite Index 

Late Wednesday, Lam reported a beat-and-raise quarter even though it outlined headwinds, hours after Netherlands-based chipmaking-equipment company ASML Holdings NV
similarly reported a beat-and-raise quarter, following weeks of profit warnings from chip makers leading up to earnings season. In the report, Lam said that U.S. restrictions on sales to China, estimated to hurt sales in 2023 by $2 billion to $2.5 billion — up to 15% of its fiscal 2022 revenue — and that wafer fabrication equipment revenue will drop more than 20%, with memory-chip companies like Micron Technology Inc. 
accounting for a large chunk of that, all while topping Wall Street estimates by a fair amount. Read: ‘This is worse than 2019’: Micron faces ‘unprecedented’ supply issues and analysts are split on if it has hit bottom Lam Research Chief Executive Tim Archer reminded analysts that he was releasing the wafer fabrication equipment estimates three months earlier than normal, to underscore the company’s transparency on the outlook, while Chief Financial Officer Douglas Bettinger said the company knows its way around a downturn. “A perfect storm is hitting Lam’s business, with the company likely the worst impacted by the new U.S. China restriction,” as well as most levered to memory chips, said Evercore ISI analyst C.J. Muse, in a note titled, “Shares Approaching a Bottom; Now’s the Time to Sharpen Your Pencils.” Muse, who has an outperform rating on the stock, cut his price target to $450 from $500. Read: Chip stocks could suffer worst year ever as effects of shortage-turned-glut spread “This is not Tim and Doug’s first rodeo, so we expect they will prudently manage the ramp of the Malaysia factory and operating expenses from here (important considering 33% headcount increase over the last 5 Q’s),” Muse said. Bernstein analyst Stacy Rasgon called the outlook “surprisingly strong,” but said that Lam executives are “not blind to the current environment either.” The early release of the estimated wafer fabrication equipment drop of 20% from around $90 billion is something of a sweet spot for the stock, “suggesting something in the ballpark” of about $70 billion next year, said Rasgon, who has an outperform rating, and lowered his price target to $ …

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