Lam Research: Micron Just Put A Hole In The Quick Memory CapEx Turnaround Hopes (LRCX)

First, the basics. WFE (Wafer Fabrication Equipment) CaPex for DRAM, NAND manufacturers has recently seen large drops in commitments.

Micron (MU) and other memory manufacturers are seeing large drops in memory pricing and demand, as well as accumulating inventories, and simply had to invest less in increasing production capacity — especially as they’re already idling existing capacity. The prospective drops in memory WFE CapEx approached 50% recently.

Such large drops in ordering memory fabrication equipment led Deutsche Bank and others to grow optimistic that a bottom in such orders would quickly be found in 2023. And thus, in anticipation of this bottom, we could start buying related stocks now.

The one WFE stock which seemed the most exposed to memory WFE was Lam Research (NASDAQ:LRCX). Hence, that’s the one stock which was thought to be the best bet for a speedy recovery after a difficult 2023. The reason here is that LAM Research depends on memory WFE for 52% of its equipment revenues.

So why am I writing an article on this theme today? Well, Micron reported earnings yesterday, and during the associated earnings call there were some news pertinent to this “quick 2023 bottom”.

Let’s first see what Micron had said in its previous earnings call:

We made significant reductions to CapEx and now expect fiscal 2023 CapEx to be around $8 billion, down more than 30% year-over-year. CapEx would be lower if it were not for more than doubling our construction CapEx, year-over-year to support the supply growth required to meet the demand for the second half of this decade, as well as investment for EUV lithography systems to support 1-gamma node development.

WFE CapEx will decline nearly 50% year-over-year and reflects a much slower ramp of our 1-beta DRAM and 232-layer NAND versus prior expectations. Fiscal 2023 WFE CapEx is focused on developing the technology capability of our leading nodes and new product introductions. To immediately address our inventory situation and reduced supply growth, we are reducing utilization in select areas in both DRAM and NAND.

That looked ugly, of course. A 30%+ drop in overall CapEx, and a nearly 50% drop in WFE CapEx, which is the most relevant for us. This was what the market now expected and underpinned the “quick recovery after 2023” thesis.

Now what did Micron say yesterday? Something uglier:

• First, we are reducing our CapEx investments to reduce bit supply growth in 2023 and 2024. Our fiscal 2023 CapEx is being lowered to a range between $7 billion to $7.5 billion from the earlier $8 billion target and the $12 billion level in fiscal year ’22.
• This represents approximately a 40% reduction year-on-year and we expect fiscal 2023 WFE to be down more than 50% year-on-year. We are now significantly reducing our fiscal 2024 CapEx from earlier plans to align with the supply-demand environment. We expect fiscal 2024 WFE to fall from fiscal 2023 levels even as construction spending increases year-on-year.

Here’s what Micron actually said, in simpler terms:

• For 2023, Micron is reducing overall CapEx even more, from a 30% drop to 40% drop.
• For 2023, Micron now expects WFE CapEx to be down more than 50%, instead of nearly 50%.
• And most importantly, even for 2024 Micron now expects WFE CapEx to be down from 2023!

In short, not only are the WFE CapEx short-term drops looking uglier than before, but Micron expect them to become uglier still for 2024, not better. And uglier from reduced levels, no less.

This is already enough to put a hole in the hopes of a quick recovery. But it did get slightly worse. Micron also said:

Third, in response to the decline in expected long-term CAGR for DRAM and NAND bit growth, we are slowing the cadence of our process technology node transitions. This change will help us align our long-term bit supply CAGR investments. Given our decision to slow the 1-beta DRAM production ramp, we expect that our 1-gamma introduction will now be in 2025.

Similarly, our next NAND node beyond 232-layer will be delayed to align to the new demand outlook and required supply growth. We expect these changes to the technology node cadence to be an industry-wide phenomenon. With our industry-leading technology capability, we expect to remain very well positioned.

What does this mean?

It means Micron is slowing down deployment of leading-edge technologies and processes. This helps reduce WFE CapEx as already stated, but it also hits on another positive thesis that’s often used for semiconductor fabrication equipment stocks to mitigate just how cyclical they are: The thesis is that the leading-edge generates demand that’s almost unavoidable. Well, here Micron is avoiding/delaying a bit of that leading-edge demand.

On the subject of how WFE manufacturing is much more cyclical than semiconductor fabrication itself, I’d also greatly recommend reading a recent article of mine: “Applied Materials Is Not Safe, And The Problem Isn’t China”

Conclusion

Micron just showed not only that short-term demand for WFE equipment for memory fabrication is set to be even uglier than was already expected, but that 2024 isn’t all that safe for a rebound, either.

This Micron development puts a large hole on some of the theses which have sustained a rebound on Lam Research, the most exposed to memory WFE. I expect LRCX and other related stocks to be punished by this development.

Remember, LRCX still trades at nearly 13x its current year earnings. These are peak earnings on a very cyclical industry facing a very deep negative cycle. Half of that P/E would be perfectly reasonable under these conditions). Meaning, half the current stock price happening isn’t something impossible at all.