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

Late Wednesday, Lam reported a beat-and-raise quarter even though it outlined headwinds, hours after Netherlands-based chipmaking-equipment company ASML Holdings NV
ASML,
+2.11%
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. 
MU,
+1.13%
accounting for a large chunk of that, all while topping Wall Street estimates by a fair amount.

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 reminded them that 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 execs 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 $425 from $500.

Read: Taiwan Semi rallies as exposure to China restrictions minimal, capital spending cut

“Most buy-side investors have been eyeing a ~$70B WFE number for some time, and have wanted nothing else but for semicap companies to suggest it as well, in that light we are glad that Lam gave us the number (and earlier than their normal practice would typically suggest),” Rasgon said. “So while Lam estimates are going to come down now, likely materially, it should be very helpful for the shares to finally find a bottom.”

Of the 26 analysts who cover Lam, 16 have buy grade ratings and 10 have hold-grade ratings. Of those, 13 lowered their price targets, while only one hiked theirs, resulting in an average price target of $424.14, down from a previous $546.95, according to FactSet data.

In fact, the SOX index outperformed the broader market Thursday, rising 1%, as the S&P 500 and Nasdaq both slipped around 0.5%.

Shares of other chip-related companies outperforming the SOX index Thursday were KLA Corp.
KLAC,
+0.91%,
which reports earnings this coming Wednesday, Applied Materials Inc.
AMAT,
+1.50%,
Nvidia Corp.
NVDA,
+1.63%,
and Advanced Micro Devices Inc.
AMD,
+1.00%