According to Woofun AI, LRCX.US (Lam Research) surpassed expectations in the first quarter of fiscal year 2027, but AB.US (Bernstein) immediately adjusted the valuation logic and lowered the target price from $385 to $350, while maintaining the outperforming rating.
Behind this seemingly contradictory operation is the agency's repricing of structural bottlenecks in the wafer manufacturing equipment (WFE) industry: despite strong company fundamentals, cleanroom space restrictions have become a core variable limiting long-term valuation expansion. Bernstein reduced the valuation multiplier from 35 times to 30 times, reflecting the market's cautious expectations of supply chain constraints and the pace of infrastructure delivery.
This divergence of 'strong performance and declining valuation' reveals a logical shift in semiconductor equipment stocks from simple demand driven to capacity constraints in the current cycle. Notably, despite short-term guidance due to supply chain disruptions, institutions still believe that Fanlin's leading position in system revenue growth has not been shaken, but that the profit cashing schedule has been forced to be delayed due to physical space limitations.
This rating adjustment is not bearish, but rather a more realistic anchor for the 2027 WFE market ceiling. It aims to correct previously overly optimistic buyer expectations and provide a more reasonable valuation center for subsequent stock price fluctuations. The more critical variable is that as the January 2027 call approaches, any marginal improvement in cleanroom delivery schedule could be a key catalyst to trigger valuation fixes. Currently, the market is in a sensitive period of transition from “expected prosperity” to “realistic constraints,” and the case of Fanlin typically reflects the common challenges of this industry.
In terms of financial performance, Fanlin Group's data for the first quarter of fiscal year 2027 showed a trend that completely exceeded expectations, with revenue reaching US$8.222 billion, higher than the agreed forecast of US$8.127 billion and the guidance of US$8.1 billion. Earnings per share were recorded at $2.20, slightly above the consensus estimate of $2.19. The most notable indicator is the gross profit margin, which climbed to 52.4%, not only higher than the agreed forecast of 52.1% and the guideline of 52.0%, but also set a record high in 20 years.
The achievement of this historic high point was mainly due to favorable customer and product structure optimization, which effectively offset some of the cost pressure. Looking at the business segment, system revenue contributed 5.733 billion US dollars, a sharp increase of 35% over the previous year, surging 62% year over year, far exceeding the agreed forecast of US$5.46 billion, and became the core engine for performance exceeding expectations. In contrast, the Customer Support Business Group (CSBG) revenue was $2.49 billion, a slight increase of 1% month-on-month and 40% year-over-year, but fell short of the agreed estimate of $2.72 billion, indicating relatively flat market growth after the sale. In the terminal market segment, the foundry business accounted for 46% of system revenue, with revenue growth of 41% month-on-month, mainly driven by strong demand for leading nodes and advanced packaging; the NAND flash memory business accounted for 26%, with revenue surging 52% month-on-month, driven by customer upgrades to 256-layer equipment and initial spending on 384-layer equipment; the DRAM business accounted for 20%, and revenue increased 17% month-on-month, mainly in wafer increments and process migration; logic chips and other businesses accounted for 8% month-on-month growth.
Furthermore, the operating margin reached 40.2%, higher than the agreed estimate of 39.8%. In terms of tax rates, the actual tax rate was 16.5%, higher than the expected 15.1%. This is mainly due to the rise in the US foreign income tax rate and changes in the regional revenue structure.
According to data compiled by Woofun AI, this financial structure, which is dominated by system revenue and has a record high gross margin, shows that Fanlin's pricing power in the field of high-value-added equipment is still stable. Although CSBG's performance is slightly weak, the increase in overall profitability is sufficient to support its market position.
However, the corrosive effect of high tax rates on earnings per share cannot be ignored, which is further reflected in subsequent guidance.
Drastic changes in the regional revenue structure are another major focus of the current financial report, especially the significant recovery in influence in the Chinese market. China's share of revenue jumped from 26% in the previous quarter to 35%, an increase of 9 percentage points over the previous quarter, and the absolute amount increased by about 1.1 billion US dollars.
This growth is mainly due to strong demand from domestic customers, while the business of multinational customers in China has remained relatively stable. In contrast, the revenue share of other regions was: Taiwan 18%, South Korea 20%, the US 8%, Japan 9%, Southeast Asia 6%, and Europe 4%, respectively. Bernstein pointed out that the rise in China's share of revenue is clearly characterized by quarterly fluctuations rather than a long-term trend. In the second quarter guidance, China's revenue share is expected to be significantly lower than in the first quarter, mainly because domestic customer revenue is expected to decline, while multinational customers remain stable.
This fluctuation reflects the adjustment of the expenditure structure of China's semiconductor industry chain between mature nodes and advanced nodes: spending on mature nodes is declining, while spending on leading nodes and advanced packaging is rising, and the overall structure is improving. Although China's rising share of revenue usually puts pressure on gross margins, Fanlin successfully reached a 20-year high in gross margin by optimizing customers and product portfolios, proving its ability to control costs and enhance its products. Bernstein stressed that the guideline gross margin for the second quarter was 52.5%. Even when China's share of revenue declined and the customer structure deteriorated, the gross margin remained flat month-on-month, which further verified the reality of the company's profit resilience. Looking at regional distribution, South Korea and Taiwan are traditional semiconductor towns, accounting for 38% in total, showing the deep roots of Fanlin's core manufacturing base in Asia. However, the US accounts for only 8%, reflecting that the return of domestic manufacturing is still in its early stages.
This dynamic balance of regional structures requires investors to pay close attention to the pace of capital expenditure in major markets, especially the continuity of domestic customer demand in China and the adjustment of procurement strategies of multinational customers under geopolitical uncertainty.
Looking ahead to the second quarter guidance issued on October 22, 2026, Fanlin Group expects revenue of US$8.6 billion, which is in line with agreed expectations, but may fall short of the higher expectations of some buyers. The gross margin guideline was 52.5%, higher than the agreed forecast of 51.9%; the operating margin guideline was 40.5%, higher than the agreed estimate of 39.6%; the earnings per share guideline was $2.33, slightly lower than the agreed forecast of $2.34, mainly affected by rising tax rates. Management clearly mentioned during the conference call that supply chain restrictions have had a negative impact on revenue guidance, and the company is currently actively addressing this issue. Any shipments delayed from the December quarter due to supply chain issues will be delivered in the March quarter.
This means that the annual revenue pace will show the characteristics of 'low before and high', but the total volume will not be affected. Bernstein believes that without supply chain constraints, the company's outlook will be more optimistic. The current stock price fell after the market, partly reflecting buyers' disappointment with the failure of higher guidance.
However, from a long-term perspective, supply chain constraints are only short-term disruptions and do not affect profit trends throughout the year. The broader 2027 calendar wafer manufacturing equipment (WFE) outlook was set at least $200 billion. This figure was first given by Fanlin Group, but it is still limited by cleanroom space. Management reiterated its confidence to continue to outperform the market and expected system revenue growth of at least 30% and CSBG growth of at least 15%. By terminal market, DRAM grew the fastest, followed by advanced logic and NAND, and advanced packaging grew strongly. Bernstein pointed out that the target of more than $250 billion expected by some buyers is unrealistic because cleanroom construction takes time, and space bottlenecks are difficult to break through in the short term. Actual demand is far higher than US$200 billion. As data center capacity construction progresses, equipment demand will gradually be released. Fanlin Group plans to provide more specific figures during a conference call in January 2027, at which time the WFE outlook may increase quarterly as supply and cleanroom conditions become clear.
This outlook framework shows that industry growth has moved from 'unlimited demand' to 'limited supply', and the pace of clean room delivery will be a key variable that determines the speed at which equipment manufacturers deliver results.
In terms of long-term profit forecasts and valuation adjustments, Bernstein raised Fanlin Group's revenue and earnings per share expectations for the next three years, but lowered the valuation multiples. Revenue expectations for FY2027 were raised from $34.6 billion to $35.2 billion, FY2028 from $38.9 billion to $40.8 billion, and FY2029 from $45.3 billion to $47.1 billion. In terms of earnings per share, it was raised from $9.22 to $9.62 in fiscal 2027, $10.97 to $11.69 in fiscal 2028, and $13.65 to $14.23 in fiscal 2029.
Despite rising profit expectations, the valuation multiplier was reduced from 35x to 30x to reflect the reality that the WFE environment is still constrained by clean rooms. Based on 30x FY2028 earnings of $11.69 per share, the target price was lowered from $385 to $350. The current share price is $260.81, and the target price is 34% higher than the current price, indicating that there is still room for growth. Bernstein believes that Fanlin Group's valuation is close to 25 times the price-earnings ratio for the next 12 months and 20 times the price-earnings ratio for the 2028 fiscal year, and its appeal is rising. Cash flow performance was also strong, with cash returns of $1,336 million in the first quarter, accounting for 41% of free cash flow; cash returns over the past 12 months represented 79% of free cash flow. Free cash flow was $3.24 billion, or approximately $6.5 billion over the past 12 months. The number of inventory days dropped to 106 days, and the inventory turnover rate was about 3.4 times, the highest level in 7 years. The remaining repurchase authorizations amount to $3 billion and are scheduled to continue in the December quarter.
This series of financial indicators shows that while maintaining high growth, Fanlin Group has strong cash generation capacity and shareholders' willingness to return. With the gradual easing of cleanroom bottlenecks and the introduction of more clear guidelines in January 2027, Fanlin Group's valuation is expected to be repaired. Investors should focus on the March quarter's restocking situation and the pace of cleanroom deliveries, which will be key points in validating the long-term growth logic. Overall, Fanlin Group is in a stage of transition from short-term fluctuations to long-term certainty. Its fundamental advantages are still significant, but the valuation logic needs to adapt to new industry constraints.