When Lam Research Corporation (NASDAQ:LRCX) reports quarterly earnings after the market close today, investors will look closely at the company’s outlook for the semiconductor market.
Already, the stock is pricing in a decent-sized growth ahead. LRCX stock trades at elevated P/E levels, but forward multiples are at a conservative 13 times earnings. Management has a value creation plan that will make the most of the data economy. So chances are good that Lam Research will grow earnings by 77% this year.
In its upcoming quarterly earnings report, Lam Research will detail its business growth, helped by three key trends: connecting devices and people, the cloud, and AI. Since data analytics is still in a growth phase, its application in such areas as climate change research and healthcare will drive revenue higher in the quarter.
Artificial intelligence will accelerate the rise in the data economy exponentially. Lately, though, developments in AI may have slowed or will slow in the near-term for two reasons. First, Tesla Inc (NASDAQ:TSLA) may spend more research on building more driver safety in its autonomous driving solutions. Second, in the social networking space, Facebook, Inc. (NASDAQ:FB) may shift its efforts on securing its platform from hackers and bots. Before the Facebook/Cambridge Analytica scandal, Facebook was set to invest more in AI to give the company the power to better understand its user base.
But despite some potential slowing in AI developments, Lam Research will still grow from the enormous data volume increases needed to achieve AI Accuracy. Plus, the more computing power needed, the more memory required for the system. This will lead to higher sales of data solutions for the company and justify the valuation of LRCX stock.
Note that on finbox.io, 7 models built by users suggest that LRCX stock is undervalued by around 10%.
Third Quarter Could Beat Consensus Estimates
Just as Lam Research beat consensus estimates in its second fiscal quarter, it may do the same in Q3. In the Q2 report issued on Jan. 24, the company earned $4.34 a share, beating analyst estimates by 66 cents a share. Revenue jumped 37.2% year-over-year to $2.58 billion. Another quarterly earnings beat will serve once again to give investors the confidence in holding the stock for the long-term — that is, for at least 5–10 years.
Almost every product has a chip that involves Lam. In 2017, Lam reported an incredible six consecutive years of growth and industry outperformance. Shipments grew 24% annually.
Outlook for 2018
Looking ahead, Lam Research expects growth in overall WFE (Web front-end) in the low-double-digit percentages. DRAM and logic investments are still in a growth phase. About 85% of the expected spending growth will be based on memory products. Last year, DRAM supply remained tight, leading to elevated prices since demand did not pull back. DDR4 prices did fall slightly at the start of the year but that could be due to a lack of smartphone makers launching new products. As such, the orders for memory supply slowed.
In the PC space, a refresh in Ryzen processor made by Advanced Micro Devices, Inc. (NASDAQ:AMD), a rollout in Intel Corporation’s (NASDAQ:INTC) latest chip, such as the X-Series and i9 Processors, could give a push in demand for desktop-based memory modules.
Other Positive Surprises
Lam may announce a dividend raise or a more aggressive lift in increasing shareholder returns. The company has a history of returning its excess cash from operations to shareholders. Last year, Lam Research generated over $2 billion in cash from operations, up 37% from 2016 levels. It returned $2.193 billion to its shareholders through a share buyback and with a dividend payout.
As of this writing, Chris Lau owns shares of AMD.