RBC: We're Downgrading Lam Research

• Lam Research Corporation LRCX shares are down 21 percent since July 6, remaining below the $75 mark since the beginning of August.
• RBC Capital Markets analyst Mahesh Sanganeria downgraded the rating on the company from Sector Perform to Underperform, while reducing the price target from $76 to $52.
• DRAM spending is expected to decline in 2016, while 3D NAND appears to be limited, Sanganeria said

Analyst Mahesh Sanganeria expects total capex to decline 13 percent y/y in CY16 to $46B. The downturn would mostly be on account of a 38 percent decline in DRAM capex, a 17 percent drop in NAND spending, flattish foundry investment and 3 percent growth in IDM.

“In our opinion, DRAM spending is positioned to decline in 2016 after two years of high level spending on new capacity and 20nm conversion. 3D NAND in CY16 appears to be limited after Samsung filled up Xi'an fab with 90k capacity as Micron and Toshiba need to expand current fabs for 3D conversion,” Sanganeria wrote.

The analyst added that foundry and IDM spending are likely to remain under pressure until 10nm ramp.

Shipment to the memory, including DRAM and NAND, segment represents 60 percent of Lam’s total shipments. Sanganeria said that Samsung’s investment in 3D NAND is likely to enable Lam to reach its shipment guidance of $1.58B for the September quarter.

However, Lam had indicated that its shipments in the December quarter would be lower than the level in the March quarter, representing a 20 percent sequential decline. “While we currently model 25% q/q for DecQ, we see potential downside risk to our estimates,” Sanganeria mentioned.

The RBC estimates for CY16 revenue and EPS are $5B and $4.00, versus the consensus expectation of $6.1B and $6.39, respectively. “Given our expectation of a 13% decline in total capex, we expect consensus to come down towards to our estimate,” Sanganeria added.