The shares of the leading supplier of wafer fabrication equipment and services, Lam Research (LRCX), have fallen sharply after the company’s recent disappointing revenue and earnings guidance for its fiscal 2019 first quarter. On its July 26, 4Q-2018 report the company guided for its next quarter revenue of $2.15-$2.45 billion while the consensus among analysts was for revenue of $2.78 billion. What’s more, Lam Research expects Non-GAAP Earnings per Share of $3.00-$3.40 for the June 2018 quarter lower than $5.31 in the March 2018, quarter, and $3.46 in the June 2017 quarter. The decline in memory chip prices especially NAND flash prices was the primary cause of the disappointing outlook since 80% of the company’s products had been supplied to memory producers in the June 2018 quarter, 55% to NAND, and 25% to DRAM.

The performance of Lam’s shares, in comparison to other semiconductor and semiconductor equipment manufacturers, year-to-date, one year and from 52 week high and low are shown in the table below.

Only Applied Materials (AMAT) shares have shown a steeper decline from its 52 week high than those of Lam Research, 40.3% vs. 37.0%.

However, in my opinion, the decline in the demand for Lam’s products is temporary since new applications like the Internet of Things (IoT), Artificial Intelligence (AI), Big Data and Cloud will need an increasing amount of memory.

Meanwhile, Lam’s fundamentals are excellent, and its valuation ratios indicate an undervalued stock. Lam’s trailing price to earnings is very low 8.67, and its forward P/E is even lower 8.19. The Enterprise Value/EBITDA ratio is extremely low at 5.59. According to James P. O’Shaughnessy, the Enterprise Value/EBITDA ratio is the best-performing single value factor. In his impressive book “What Works on Wall Street,” Mr. O’Shaughnessy demonstrates that 46 years backtesting, from 1963 to 2009, have shown that companies with the lowest EV/EBITDA ratio have given the best return.