Vacuuming Up Semiconductors: LAM Research (LRCX $291.84)
Photo: Pok Rie
Pandemic restructuring is forcing the semiconductor supply closer to customers. The cleaner fab methods now needed will create new winners.
Semiconductors have always been easy to make -- in a toxic, costly, and incredibly wasteful sort of way. Any college engineering student can make reasonably powerful computer chips. If, that is, they’re comfortable with the nasty chemical vapors produced by materials such as silicon oxide and fluorocarbons. And if they can handle the poisonous substrates of gallium arsenide or silicon nitride. Then there’s the 1,000-degree oven to power and the obscene amounts of water needed to chemically layer up computer chips. In 2015, for example, chip giant Intel reportedly used 9 billion gallons of water!
It’s always been the way in Silicon Valley: The devices computer chips enable may be glorious. But the guts of smartphones and tablets are dirty and thirsty things.
Then, suddenly, the chip business breaks: An incurable virus emerges from China, and the scrupulously engineered global supply chain that creates semiconductors goes limp. In its place, up pops a disordered, links-style golf course of semiconductor logistics that was tricky to navigate. Critical parts could not be found. Devices like Webcams could not be shipped. Short-term demand plummeted as makers panicked.
According to representatives we spoke with, semiconductor makers raced to meet capacity, just as the ability to meet that capacity faced unprecedented pressure. Almost overnight, remote chip fab plants, with its attendant shipping and logistics problems, were seen as not worth the hassle.
Post-pandemic chip production, we are told, will be all about bringing fabrication closer to the markets where finished electronics will be sold. Such regionalization of computer chip production will put major makers a bind. Intel can’t simply wind down production in say, Dalian, China and move it to Rio Rancho, New Mexico. Where do the poisonous gases go? Where does all the water needed come from?
No CEO is going to risk infuriating customers by causing water shortages near rich-world markets.
The thinking is, even if it costs more, the localization of chip production will force a change away from the caustic chemical vapor deposition techniques traditionally used to make semiconductors. And toward much kinder and gentler ways to computer chips.
Flawlessly Engineered Financials.
A promising option for cleaner chip making is called physical vapor deposition, or PVD. PVD chips mostly use vacuum deposition techniques and in particular, certain kinds of ionic ejection technologies called sputtering -- which really is as much fun to research and think about as it is to say.
The thinking is, even if it costs more, the localization of chip production will force a change away from the caustic chemical vapor deposition techniques traditionally used to make semiconductors. And toward much kinder and gentler ways to computer chips.
PVD-made chips might be more expensive. But they are less toxic. Researchers Uffe Midtgard and Jens E. Jelnes, in a 1991 paper on Toxicology and Occupational Hazards for chips, say proper PVD chip fabrication is about particle management and not managing noxious materials. It is all about keeping a really clean production room.
Such molecular-level dust control is all about creating and managing vacuums in large production areas. If there is a single power in managing and maintaining the intricate engineering of vacuum management in chip fab, it is Fremont, California-based Lam Research.
This operation excels at creating the kind of flawless thin films needed for the new way chips must be made in the pandemic era. And Lam has engineered some damn attractive financial statements in the process. Cash flows from operations essentially tripled since 2015, even though sales fell by about 10% from 2018 to 2019, as lower cost competitors began to hassle it globally.
The stock is held by institutional investors throughout the world, including Blackrock, Vanguard and FMR. Seventy-three percent of such major investors increased their holdings of recent, 48 percent decreased. Even after three months of COVID recovery, the stock is still trading at about a 19.5 price-to-earnings ratio. That’s about half of hot chip companies like Broadcom and the frankly overpriced Analog Devices.
We’re not saying the semiconductor market that Lam Research operates in is easy. Scaling and growth will be an issue. There are direct competitors like Applied Materials and targeted vacuum valve makers like VAT.
Each can compete on price, location and all the rest. Chips are hard.
But still, there is value here. Lam Research is trading at about $275. But has traded up near $340 in the past year. Buyers have outbid sellers for at least 18 months. It’s interesting to consider what Lam will be worth in a global supply chain where faster and cheaper matters little.
In the 21st century, computer chips will need to be made close at hand. They can't be poisonous to make and distribute.
