Embracing Next-Generation DRAM And NAND Technologies Will Shape Future Success

Key Takeaways

• Expected growth in advanced DRAM equipment sales and recovering NAND sales could significantly boost revenue and enhance net margins.
  
• Investment in R&D and expansion in new business areas aims to drive innovation and long-term revenue growth without harming net margins.
  
• Uncertainty in semiconductor investments, particularly in DRAM and NAND, combined with declining China sales and high capital expenditures, could restrict revenue and net margins.

Catalysts

Engages in the development, manufacture, sale, repair, and maintenance of semiconductor manufacturing equipment worldwide.

• The company is expecting significant growth in equipment sales for advanced DRAM due to continued investment by device makers in next-generation technologies. This is likely to positively impact revenue.
  
• Sales for NAND equipment are anticipated to recover as generational shifts progress, which could increase both equipment and service sales, enhancing overall revenue.
  
• There is an effort to increase the sales mix of high value-added products like batch ALD and single wafer treatment equipment, which should maintain or improve net margins.
  
• The company plans to keep investing in R&D for next-generation products while aiming to maintain R&D expenses as a percentage of sales within a manageable range. This could lead to innovation without significantly impacting net margins.
  
• A focus on expanding sales in new business areas like advanced packaging as well as increased demand for leading-edge market products is expected to stimulate revenue growth and improve earnings in the long term.

Kokusai Electric Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kokusai Electric's revenue will grow by 11.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.2% today to 17.7% in 3 years time.
• Analysts expect earnings to reach ¥54.3 billion (and earnings per share of ¥235.45) by about March 2028, up from ¥31.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.9x on those 2028 earnings, down from 21.7x today. This future PE is greater than the current PE for the JP Semiconductor industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 1.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.8%, as per the Simply Wall St company report.

Kokusai Electric Future Earnings Per Share Growth

Risks

• Uncertainty in the semiconductor market and fluctuating investments, particularly in DRAM and NAND, may result in lower equipment sales and affect revenue growth.
  
• Declining sales to China due to anticipated reductions in DRAM investment and potential slowdowns in mature node logic/foundry could impact revenue streams significantly.
  
• The flat World Front End (WFE) forecast and possible slow pace of market growth compared to peers' expectations could constrain revenue and earnings.
  
• High dependency on generation change investments in NAND and the uncertain sustainability of these investments could pose risks to revenue consistency.
  
• Potential volatility in cash flows due to significant capital expenditures and treasury stock purchases could affect net margins and financial stability.

Valuation

• The analysts have a consensus price target of ¥3516.667 for Kokusai Electric based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥4600.0, and the most bearish reporting a price target of just ¥2200.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥307.5 billion, earnings will come to ¥54.3 billion, and it would be trading on a PE ratio of 17.9x, assuming you use a discount rate of 7.8%.
• Given the current share price of ¥2975.5, the analyst price target of ¥3516.67 is 15.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.