Insight From Lam Research's Earnings Report

What did we learn from the Lam Research (LRCX) earnings report? It met our expectations - that’s for sure. There are some pretty obvious factors at play:

1. Memory spending is driving the majority of their business. Tools for memory makers were 75% of new orders this quarter. 47% of these orders were for the production of NAND Flash.

2. Tools used to process 300m wafers made up 89% of all new orders.

3. Tools used to produce devices with 90nm and smaller feature sizes generated 95% of all new orders.

4. The company continues to improve their operational performance. Records were set in new orders, revenue, operating margins, earnings, and cash from operations.

5. New orders grew 13% sequentially to $725 million.

6. Management expects new orders to flatten for the next few quarters as customers balance supply and demand.

7. Management said they will be increasing their shipment levels over the next few quarters. The company has deferred revenue and deferred profit of $258 million and $153 million. In addition to deferred revenues, approximately $74 million of anticipated future revenue value is being held for previously made shipments to Japanese customers.

8. New products are being developed for the following markets: Wafer clean, bevel clean, next generation patterning, post implant, strip, and other integrated strip applications, MEM’s, and productivity enhancing software products for Lam tools.

Okay, none of this is a surprise. Wall Street, even the sell-siders, have been chattering noisily about this report for a few weeks. In reality, Lam has been banging on all eight cylinders for a number of years. From an operating perspective, it is hard to argue with their metrics. One might say they are “best-in-class.”

As mentioned in a previous note, current business conditions are one thing, trends in the stock market are another..... The way Lam’s shares were jumping around after the close and Thursday morning’s session proves that there is a lot of noise out there.

Wednesday, after hour investors cheered the way Lam beat Wall Street expectations sending the stock price up to $51.80. During the conference call, probably when it was suggested by management that business would “flatten” for a few quarters, the stock gave up all its gains and then some - it only took a matter of minutes. Sell the news.....

Is that it? Is that all there is to the story? Down-cycle here we come?

No way, Jose....