Tokyo Electron Earnings: Despite Turbulent Waters Ahead, Shares Are Undervalued

Tokyo Electron Ltd 8035. recorded fiscal fourth-quarter results consistent with our expectations. Management echoed negative sentiment for lower wafer fab equipment spending in 2023 due to weaker demand from memory customers as well as slowing demand from foundry and logic chipmakers. For fiscal 2024 (ending March 2024), management expects revenue to decline 23%, driven by lower NAND revenue. As memory spending recovers, we think Tokyo Electron will enjoy high-teens growth in fiscal 2025. We are maintaining our fair value estimate for narrow-moat Tokyo Electron at JPY 16,700. Shares look modestly attractive at current levels.

Fourth-quarter revenue was down 1% year over year to JPY 558 billion with growth in logic and foundry more than offset by lower sales to memory customers. Logic and foundry sales were up 36% year over year, which we attribute to ongoing investments by TSMC and Intel for advanced process nodes such as the former’s 3-nanometer process and the latter’s Intel 4 process. DRAM sales fell 60% year over year and NAND sales fell 14% year over year as memory customers cut capital expenditures amid elevated inventories and softer demand for PCs and smartphones.

For fiscal 2023, logic and foundry equipment sales grew 47% year over year, whereas NAND was relatively flat and DRAM was down 40% year over year. By equipment segment, the firm disclosed its etch system sales were roughly flat year over year, compared with deposition that grew 13% year over year and photoresist coater/developer sales that grew 28% year over year.

Management expects revenue for the first half of fiscal 2024 to be down 33% year over year, with a modest recovery in the second half of fiscal 2024. We believe memory chipmakers are spending the absolute bare minimum in capital expenditures, and we think there will be a sharp increase in memory investments as demand recovers and inventory levels normalize, though this could be late 2023 or early 2024 depending on macroeconomic conditions.