Lam Research Poised to Suffer From Latest Export Restrictions to China; Lowering FVE to $620

We are lowering our fair value estimate for wide-moat Lam Research to $620 per share from $720 after incorporating recent export restrictions and weaker wafer fab equipment, or WFE, expectations for 2023. On Oct. 12, close peer Applied Materials lowered its fiscal fourth-quarter revenue outlook by $400 million due to the latest export restrictions intended to curb China’s chip ambitions and ability to advance its military technology. We expect Lam to also be negatively impacted given its dominance in 3D NAND equipment and exposure to Yangtze Memory Technologies, or YMTC, China’s NAND champion that is a qualified vendor for 128-layer 3D NAND for Apple’s iPhones sold in China. We had already reduced our NAND equipment sales outlook for Lam stemming from Micron’s recent capital expenditure cuts for its fiscal 2023, but we are further lowering our 2023 WFE assumptions as TSMC has also cut its capital expenditure budget for 2022 (from $40 billion to $36 billion) and is likely to reduce spending in 2023, in our view. While shares of Lam are undervalued at current levels, we think market conditions will remain volatile for several quarters as the firm navigates uncertainty related to export restrictions and tepid demand in 2023.