Tokyo Electron: Approaching Reasonable Valuation Again (OTCMKTS:TOELY)

We started covering Tokyo Electron (OTCPK:TOELY)(OTCPK:TOELF) a little over two years ago, and since then, the stock has significantly outperformed the S&P 500 (SP500)(SPY). Last year, we updated our thesis to o “Hold” as we saw the stock fully priced and potential headwinds. While the stock price has changed very little over the past year, the fundamentals are once again on an upward trend for the company. The valuation is starting to look reasonable again, although we’d like to see some margin of safety in the valuation before we buy.

With the enormous attention the semiconductor ( SOXX ) sector has been receiving in recent years, even foreign companies like ASML ( ASML ) and even Tokyo Electron are becoming more familiar to U.S. investors. As we mentioned when we started covering the company, nearly every chip manufactured in the world passes through at least one machine built by Tokyo Electron, but the company is not a household name outside of Japan. We see this as a blessing in disguise; otherwise, they would likely trade at much higher valuation multiples.

In any case, we remain bullish on the company’s long-term prospects as it continues to increase its R&D spending and steadily expand its competitive edge. The company continues to come up with new innovations and efficiencies that have resulted in increased revenue and profit margins. For fiscal 2025, Tokyo Electron delivers record revenue, operating profit and earnings per share (EPS).

First quarter of 2025 financial results

Tokyo Electron started fiscal 2025 with solid results, despite the declining contribution of DRAM and non-volatile memory, logic chips grew enough to help the company achieve strong earnings. Revenue reached ¥555 billion in the first quarter, up 1.4% sequentially and up 41% year-over-year. Similarly, net income rose slightly sequentially to ¥126.1 billion, up 1% compared to Q4 of fiscal 2024 but up 96% year-on-year.

Tokyo Electron continues to ramp up its R&D spending, which rose to ¥53 billion in the quarter, up 8.5% sequentially and 22% year-on-year. We love to see this kind of commitment to staying on the cutting edge of technology.

Research and development

Looking more closely at the company’s capital and R&D spending, it’s clear it’s not holding back. It estimates R&D spending for fiscal 2025 will rise to 253 billion yen, up significantly from 202 billion yen spent in 2024 and 191 billion yen spent in 2023.

Tokyo Electron is also spending significantly over depreciation expenses, with CapEx plans for the year of ¥170 billion, significantly higher compared to the ¥63 billion expected in impairment. Some of this spending will go towards new production and logistics locations and research and development facilities. The results of these investments can be seen in some of the recently launched products, such as the “Episode Series” single-board deposition system targeting advanced device scaling and 3D structures. The company also announced “Episode 2” systems, which will enable high-quality film deposition at high throughput. Tokyo Electron also announced a gas beam system called “Acrevia” that helps reduce costs in the EUV patterning process. While the company has already shipped customer samples of some of these next-generation devices, they aren’t expected to contribute significantly to revenue until fiscal 2027.

financial

Despite the inherent cyclicality of the semiconductor industry, Tokyo Electron has managed to double its revenue over the past decade. At the same time, it increased its gross profit and operating margins very significantly. As a result, earnings per share have tripled during that time, even though they are currently slightly below their peak reached about two years ago as the market weakened. However, we believe it is only a matter of time before the company delivers new record levels of revenue and earnings.

Balance sheet

Another thing we appreciate about Tokyo Electron is its strong balance sheet, which has an investment grade credit rating of AA according to the Japan Credit Rating Agency (JCR). This is not surprising given that the company has virtually no long-term debt, significant amounts of cash and short-term investments, and is solidly profitable.

Shareholder returns

Tokyo Electron is proposing a 2025 dividend per share of ¥519, which translates to a forward dividend yield of 2.35%, based on the native stock’s recent closing price of ¥22,000. When adding in the ¥79.9 billion the company plans to spend on share buybacks, total shareholder returns should exceed 3% at current prices.

As a reminder, TOELY is the ADR symbol, which stands for half native share, given the 2:1 ratio of the depositary receipt to the underlying native share. It’s also important to note that Japanese companies tend to vary their dividends based on recent earnings, and Tokyo Electron has a dividend policy where it aims to maintain a 50% payout ratio. As a result, dividends tend to vary more than in the US

Future prospects

The semiconductor industry currently appears to be bifurcated, with declining demand from some of the more traditional chip customers such as automakers, while investments in data centers and AI continue to see significant growth. Demand for smartphones and computers is starting to recover, but remains below peak levels. As a result, it is in the advanced logic foundry that Tokyo Electron is seeing stronger demand, which the company expects to offset weakness in demand for more mature nodes.

Taken together, the company guides double-digit growth in calendar year 2025, with cutting-edge semiconductor technologies used for AI providing the strongest impetus. Other semiconductor advances such as High Bandwidth Memory (HBM) and Gate-All-Around (GAA) should further add to Tokyo Electron’s business opportunities. The company is targeting earnings per share of ¥1,036 for fiscal 2025, a significant increase from the ¥783 delivered in fiscal 2024.

ASSESSMENT

Based on the latest guidance from the company, the forward P/E ratio would be slightly less than 22x at current prices. That’s still slightly above the ten-year average for the company, but close to what we consider a reasonable valuation. Other valuation metrics such as Price/Book and Price/Sales are similarly above their historical averages, but have declined significantly in recent quarters. Some of the expansion in valuation multiples is justified, given that Tokyo Electron has improved its profit margins over the past ten years.

Compared to other semiconductor equipment manufacturers, Tokyo Electron has one of the lowest EV/EBITDA multiples. Still, in absolute terms, a 17x EV/EBITDA multiple isn’t exactly a bargain. In any case, we see Tokyo Electron approaching the buy zone, with shares currently reasonably valued, but we like to buy with at least a 10% to 20% valuation margin of safety.

risks

The biggest risk we see for the company is that some customers may significantly scale back their expansion plans. For example, Intel ( INTC ) had previously announced ambitious expansion plans that are now less certain, with the company even considering splitting in two and possibly even abandoning factory projects.

Other major chip manufacturing sites, such as Taiwan Semiconductor’s (TSM) Arizona project, are facing delays. It remains to be seen how many of the announced factories are actually built, and whether some that recently started, such as the Taiwan Semiconductor plant in Germany, are finished on time. It also doesn’t help that capital spending on manufacturing has been on a downward trend and could fall further if the US economy enters a recession.

Conclusion

Tokyo Electron’s fiscal 2025 Q1 and full-year guidance were strong, and we see the stock moving closer to a reasonable valuation again. At the same time, we see several risks that could reduce demand for the company, including a potential recession in the US and some chip factory projects that could be cancelled. For these reasons, we will wait for a higher margin of safety before seriously considering the investment. However, we will pay more attention to the stock as it is now relatively close to what we would consider an attractive level after several years of trading at excessive valuation multiples.

Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Please be aware of the risks associated with these stocks.