We’re seeing early shoots of the memory market rebound unfolding a bit earlier than expected, with strong results from Micron and a positive outlook from Samsung on its HBM output this year due to GPU growth.
This is following a rather steep cyclical downturn in NAND and DRAM in 2023, and this rapid recovery offers a growth opportunity for both memory chip makers and WFE suppliers including Lam Research, though it should be approached carefully with a chance for oversupply in 2025.
Despite a rather soft guide for the March 2024 quarter, Lam’s management alluded to multiple pockets of strength arising through the back half of the year, with positive commentary on HBM and DRAM as well as a brighter outlook for WFE spend. Memory is a mission-critical component for AI accelerators and the newest battleground in the market, and Lam is a major equipment supplier and beneficiary of capital intensity that follows each new generation of HBM.
This memory ‘arms race’ is forecast to translate into strong revenue growth to potentially a record level, improved leverage and >35% EPS growth in fiscal 2025 (June 2024 to June 2025) From there, growth is expected to continue at a high-teens, low 20% rate through fiscal 2026. We look at this and more below.
For a deeper overview of Lam and its products and segments, refer to our August 2023 deep dive here.August 2023 deep dive here.
DRAM Market Overview: Rebound Unfolding
The DRAM market is exhibiting signs of rebounding from 2022 and 2023’s steep decline:
- Industry revenues declined more than (35%) YoY from $80.1 billion in 2022 to $51.9 billion, according to TrendForce.
- DRAM industry revenue in the fourth quarter rose 29.6% to nearly $17.5 billion, setting the stage for growth throughout 2024 as prices rise.
- DRAM prices were projected to rise 13% to 18% QoQ in Q1, followed by a more modest 3% to 8% QoQ projected increase for Q2.
Micron is expecting DRAM pricing to increase throughout the calendar year, as surging HBM and DDR5 demand tightens leading-edge DRAM supply.
These strong pricing trends and a surge in HBM revenue, from 8.4% in 2023 to 20.1% this year, are expected to aid DRAM revenue growth for the full year, with growth estimated at over 62% YoY to $84.2 billion – this is 5% higher than 2022’s level.
HBM Shipments to Surge in 2024 and 2025
With a surge in demand for GPUs, the HBM market is poised to grow at a rapid pace in 2024, and then extend this growth into 2025. HBM bit shipments are estimated to rise 147% YoY to 1.18 billion GB, leading to a projected 156% YoY increase in HBM revenues to $14.1 billion. This follows a 93% YoY increase in bit shipments and a ~104% increase in revenue in 2023.
Commentary and outlook from the three major players in the market demonstrate just how strong this growth is that we’re beginning to see.
Micron’s management expressed how strong AI server demand was “driving rapid growth in HBM, DDR5 (D5) and data center SSDs,” adding that its “2024 volume as well as pricing is all locked up.” For 2025, HBM volumes “are largely allocated. A vast majority of our production supply is allocated, and some of the pricing is already firmed up. Keep in mind, this has never happened before, right, that we are talking about 2025, and we are sitting in CQ1, and we already have so much discussion around supply and pricing for 2025 getting locked up here as we speak.”
Micron also raised a crucial point, with comments regarding Nvidia’s new Blackwell GPU lineup – the architecture “provides a 33% increase in HBM3E content, continuing a trend of steadily increasing HBM content per GPU.” This trend for higher memory content to support larger and faster GPUs is likely to continue especially as chipmakers such as AMD work quickly to encroach on Nvidia’s share with comparable or faster GPUs.
Samsung is planning a “2.9-fold increase in HBM chip production volume this year, up from the 2.5-fold projection previously announced at CES 2024,” and is “projecting a 13.8-fold surge in HBM shipments by 2026 compared to 2023.”
Lam Well Positioned to Capture HBM and DRAM Growth
Lam is well positioned to capitalize on this growth in HBM and DRAM, as Samsung, Micron and SK Hynix work to significantly boost HBM TSV capacity this year.
The trio combined for an estimated capacity of ~93K units per month at the end of 2023, and are estimated to boost HBM TSV capacity to 270K to 275K units per month by the end of 2024. As a result, Lam is expecting its “HBM-related DRAM and packaging shipments to more than triple year-on-year and outpace WFE growth in this segment by a significant margin” in 2024.
CEO Timothy Archer added that in HBM, Lam is seeing “very, very strong demand. I think that whether or not at some point, it's shipping above peak, I think that this AI market is continuing to evolve at a very, very fast rate. And all we're focused on right now is ensuring we are building out our own capacity and capabilities. And ensuring that we maintain that technology leadership that's allowing us to hold 100% market share of the TSV formation in HBM.”
We had pointed out in our August 2023 deep dive that while all three segments are important to monitor for forward growth, for a true recovery, we would need to see memory and DRAM bottom as it’s a substantial part of Lam’s business.
HBM capacity expansion, the shift to DDR5, and shipments to China have kickstarted a strong rebound in DRAM sales – in the December quarter, memory systems revenue reached 48%, a 10-percentage point increase from 38% in the September quarter. Lam noted that DRAM reached “record levels on a dollar basis, coming in at 31% of systems revenue compared with 23% in the September quarter.”
Non-volatile memory (NVM) ticked up to 17% of systems revenue in the December quarter, up from 15% in the prior quarter, though this remained significantly lower than the ~40% the segment contributed through the end of 2022 as NAND customers aggressively cut capacity in response to oversupply and elevated inventory levels. Lam noted that this was at “historic lows” for NVM, and the “slight growth was predominantly related to investments in certain technology projects.”
This has marked a pretty significant mix shift over the past four, even six, quarters – in the first half of 2023, DRAM was at just 9% of systems revenue, before rising to 31% in the December quarter.
In dollar terms, here’s what this growth in DRAM looks like:
Essentially, in two quarters – June 2023 to December 2023 – Lam has seen DRAM revenues rise 363%.
As noted earlier, management is expecting “HBM-related DRAM and packaging shipments to more than triple” this year, suggesting that DRAM systems sales could push past $1 billion by the end of FY24 (June 2024 quarter). Such growth can help offset the near-term weakness in NVM until NAND spending and upgrades resume.
Positive WFE Spending Outlook
Lam’s management shared a rather cautious view on its WFE spending outlook for the first part of the year, but expressed optimism on a recovery and strong exit to 2024 leading to a “robust” setup for the WFE market.
Here’s what CEO Timothy Archer said in the December quarter earnings call:
“As we enter 2024, the business environment remains muted. However, we expect a modest recovery in memory spending to drive a stronger exit to the year. Our early view of WFE spending for calendar 2024 is in the mid- to high $80 billion range. Growth in DRAM will be driven by capacity additions for high-bandwidth memory as well as node conversions. NAND spending increases will largely come from technology upgrades. We see foundry logic spend growing in 2024 with higher leading-edge investment, offset in part by declines in mature node investment outside of China. Overall, we believe domestic China spending will be stable in 2024.early view of WFE spending for calendar 2024 is in the mid- to high $80 billion range. Growth in DRAM will be driven by capacity additions for high-bandwidth memory as well as node conversions. NAND spending increases will largely come from technology upgrades. We see foundry logic spend growing in 2024 with higher leading-edge investment, offset in part by declines in mature node investment outside of China. Overall, we believe domestic China spending will be stable in 2024.
Longer term, the setup for WFE investment is robust. With semiconductor revenues widely expected to reach $1 trillion around the end of the decade and device manufacturing complexity continuing to rise, we believe WFE spending will need to roughly double from today's levels. Lam's served markets of etch and deposition should outpace growth in WFE overall.”the setup for WFE investment is robust. With semiconductor revenues widely expected to reach $1 trillion around the end of the decade and device manufacturing complexity continuing to rise, we believe WFE spending will need to roughly double from today's levels. Lam's served markets of etch and deposition should outpace growth in WFE overall.”
Lam’s early view for the mid to high $80 billion range represents just single digit growth YoY, with a majority of the growth being driven by HBM, which we are seeing signs of within DRAM systems sales. NAND spending cuts are likely weighing down on WFE spend, as management noted that memory WFE fell nearly 40% in 2023 on greater than 75% spending cuts in NAND.
NAND Upgrades to Aid Beyond 2024
While 2023 was extremely tough for NAND and in turn the broader memory WFE market, Lam sees a rather large opportunity to capitalize as NAND capacity comes back online due to the fact that there will be a high percentage of technology upgrades this cycle. Archer was hard-pressed for details on how this NAND recovery would unfold in the December quarter earnings call, and his comments alluded to Lam being able to capture these tech upgrades.
Archer explained in response to Cantor analyst C.J. Muse about NAND’s recovery and timeline for normalization that “as we see NAND growing — recovering and growing at a certain percentage rate, Lam will actually significantly outperform that rate because of the fact that most of that is coming from upgrades.”
And in response to BofA analyst Vivek Arya about current NAND demand and the outlook for H2 this year, Archer said that there is “a tremendous amount of capacity that [has] been offline and we've said in the past that needs to be brought back online. And I think the question and the discussions we're having is [at] what technology node should that capacity be restarted. And in many cases, there is a very high likelihood that technology upgrade certainly will occur as that equipment is brought back into service.
And so in that case, we would actually begin to see a restart of some of the utilization driven revenue that we get from things like spares and services, as well as, at the same time, a restart of technology upgrade revenues. And that's why I think that from a NAND perspective this year, we think that will effectively represent the majority of the spend that occurs in this segment.”
These technological upgrades and resumed spending in NAND will help cement in a recovery to potentially record revenues in fiscal 2025 – while the near-term rebound is more DRAM-centered, NAND’s rebound may unfold as the bigger story, given that NAND’s best-ever quarter was larger than NAND revenue in all of last year.
Double Digit Revenue Growth Through FY26 to Drive Strong Earnings Leverage
While the March quarter guide (fiscal Q3) was soft, pointing to a ~(4.4%) YoY decline at midpoint, fiscal 2025’s outlook (beginning in July of 2024) is much brighter, boosted by DRAM’s surge and NAND’s recovery.
Fiscal 2024 is expected to see a (15.2%) revenue decline to just under $14.8 billion as a result of this sharp memory WFE decline in calendar year 2023. Fiscal 2025 (beginning in July of 2024) is expected to see an 18.7% increase to a record $17.55 billion on DRAM-fueled tailwinds.
Fiscal 2026 is projected to see revenues top $20.2 billion, representing an increase of 15.6% YoY; NAND technological upgrades and continued DRAM spending are likely the main drivers of this growth.
We noted in our August deep dive that an inflection in Systems’ revenue contribution would offer further evidence that Lam had bottomed — during periods of strong demand, the breakdown is about 65%/35% between Systems and CSBG. This reflects strong sales of new hardware and the steady growth of the aftermarket that follows. During periods of weaker demand, the percentage of hardware sales decreases and aftermarket increases because there are fewer new systems sales and the aftermarket is primarily done on existing capacity.
Systems inflected in September, contributing 59% of revenue before rising to 61% of revenue in the December quarter, likely aided by this strength in DRAM sales.
In addition, we’re seeing evidence that CSBG revenue may have bottomed in the September quarter, rising 2.3% QoQ in the December quarter. Reaching this inflection point serves as an early sign that customers are planning to increase utilization. Increased utilization and higher systems sales go hand in hand, as customers boost both to capture growth in periods of higher memory chip demand.
This path to possible record revenues in FY25 and $20B+ in FY26 sets the stage for strong EPS growth. Lam has demonstrated a tremendous ability to grow earnings in the past. For example, from fiscal 2019 to fiscal 2023, Lam grew its EPS from $13.70 to $33.21.
Despite a hit to EPS in fiscal 2024 from the revenue decline and margin pressure Lam is experiencing, earnings growth in fiscal 2025 and fiscal 2026 is expected to be robust, at 22% and 26% YoY – this is faster than Lam’s earnings growth in fiscal 2022. Fiscal 2026 is estimated to see Lam generate nearly $43 in GAAP EPS, almost 54% higher than its $28 estimate for fiscal 2024.
In addition, Lam said that its new Malaysian manufacturing facility is “poised to fully scale in the coming WFE upturn, providing us the capability to nearly triple the percentage revenue contribution from our lower cost manufacturing locations versus a few years ago.” Bringing more lower cost manufacturing online provides room for operating margin expansion, which paves the way for increased operating leverage as revenue accelerates over the next two fiscal years.
However, one thing to watch is whether we see a ‘V’ or ‘U’ shaped rebound for margins. In the last memory downturn in 2019, operating margin recovered in a U-shaped fashion, taking five quarters to reclaim its 2018 levels after bottoming in December 2019. We’ve seen a rather swift contraction in TTM operating margin through 2023, and subdued revenue growth in FY24 is likely to remain a headwind on this margin rebound.
China Risks
China presents a rather real risk to Lam, not only due to rising geopolitical tensions and export restrictions, but also because the country is a primary revenue driver, contributing 40% of revenue in the December quarter, up from 26% in the June quarter.
Lam’s China revenue increased nearly 14% YoY in the first half of fiscal 2024 to $3.18 billion, while sales to Lam’s second largest segment, Korea, declined almost (35%) to $1.26 billion. It’s not necessarily that Lam is driving much higher revenue from China, as revenues are well within historical norms, but rather than China’s strong demand in the first half of the fiscal year is offsetting global weakness – the revenue trough has been significantly minimized by China. Should Lam face increased difficulties selling to China in the remainder of FY24 and into FY25 due to export restrictions, the revenue recovery may be at risk.
However, this is not solely isolated to Lam, as peers are also seeing increasing China contributions. ASML’s China systems sales reached 49% in its first quarter, versus a single-digit percentage just a year ago, while KLA’s China sales reached 41% in the December quarter, versus 23% in the prior December quarter.
Fiscal Q3 Earnings Preview
Lam’s fiscal Q3 (March 2024 quarter) is expected to be the last quarter of its revenue trough, with revenue expected to inflect back to YoY and QoQ growth in the June 2024 quarter. Sentiment in semis was weak last week heading in to Lam’s report this week. Primarily, the lackluster response to TSMC’s solid top and bottom line beat, the selloff following ASML’s weak bookings and a sharp industry-wide selloff to end last week.
Here are our notes for the upcoming earnings report:
Revenue and EPS:
- Lam guided for $3.7 billion, +/- $300 million in revenue for the March quarter, pointing to a YoY decline of (4.4%) at midpoint.
- GAAP EPS was guided at $6.90, +/- $0.75, representing YoY growth of 14.8% at midpoint. Non-GAAP EPS was guided at $7.25, +/- $0.75, representing YoY growth of 3.7% at midpoint.
- Analysts expect revenue of $3.73 billion and non-GAAP EPS of $7.30, slightly above the midpoint of both figures. The EPS figure has been revised 9.32% higher over the last 3 months, revised 9.32% higher over the last 3 months, suggesting analysts are looking for improved operating leverage aiding bottom line growth.
Margins
- Lam guided for GAAP gross margin of 47.2%, +/- 1%, and non-GAAP gross margin of 48.0%, +/- 1%. This would represent a 570 bp expansion for the GAAP margin and a 400 bp YoY expansion for the non-GAAP margin at midpoint.
- am guided for a GAAP operating margin of 28.1%, +/- 1%, and non-GAAP operating margin of 29.5%, +/- 1%. This would represent a 370 bp YoY expansion for the GAAP margin and a 120 bp expansion for the non-GAAP margin.
This YoY improvement in GAAP margins is aiding the earnings leverage that Lam is seeing, calling for double-digit YoY GAAP EPS growth on a decline in revenue. GAAP operating margin is approximately flat QoQ, hinting that the margin recovery may take more of a U-shaped pattern.
What to Watch:
Systems sales mix: Systems sales have steadily increased from 53% of revenue in the June quarter to 61% of revenue in the December quarter, suggesting healthy demand for new hardware in the market. Ideally, systems sales will maintain this 61% mix or increase it slightly in the March quarter.
DRAM systems revenue: Given management’s commentary about tripling HBM-related DRAM and packaging revenue this year and DRAM’s surge from 9% to 31% of systems revenue, we’re watching for continued growth here. DRAM systems sales have increased by $550 million, from $155 million to $718 million, and while a $1 billion quarter in Q3 is unlikely, strong double-digit sequential growth further supports the story that we will see a $1B+ DRAM systems revenue quarter in the next couple of quarters.
Q4 guide: Though this is rather obvious, Q3’s guide will ultimately be one of the more important pieces of the report, as Lam is expected to shift back to double-digit YoY revenue and EPS growth in fiscal Q4 (the June quarter) – however, QoQ growth is minimal, estimated at less than $60 million, so ideally we would like to see Q4’s revenue guide pointing to a QoQ increase. Analyst estimates are projecting 17.9% YoY revenue growth to $3.78 billion and 22.2% YoY EPS growth to $7.31, just $0.01 higher than the $7.30 estimate for Q3.
Conclusion
Lam is a primary beneficiary of this memory upcycle driven by GPU upgrades, with memory being the current battleground rather than computing power. Q3 is expected to be the inflection point for revenue and EPS growth before Lam returns to double-digit growth rates. DRAM systems sales have been surging as memory chipmakers work to rapidly expand HBM3 and HBM3e production, while NAND sales have been sluggish over the past couple quarters as spending has not yet resumed.
Lam Research reports after the bell on Wednesday. This research helps us get ready regardless of what’s reported. Our goal over the next few quarters is to build a bigger position in Lam Research. However, we need to see what comes from this report before we determine when to layer-in. As you know, we initiated a starter position this past quarter. This refreshes our analysis from August and we look forward to updating you post-earnings Wednesday evening.
Damien Robbins, Equity Analyst for the I/O Fund, contributed to this analysis
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