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Tokyo Electron Leveraging Semiconductor Math, And Looking For Share Gain Opportunities

Stephen Simpson profile picture
Stephen Simpson


  • Between increased semiconductor volume, driven by significant chip content growth in multiple markets, and increasing capex intensity, Tokyo Electron is looking at strong underlying market growth over the next decade.
  • TEL enjoys strong market share in several key markets, but also has share growth opportunities in clean, etch, and deposition, as well as leverage to growing adoption of EUV lithography.
  • Margin performance has been less than exemplary, and management really needs to buckle down on finding ways to improve gross margins.
  • Double-digit revenue and FCF growth can support a mid-single-digit long-term annualized return, and the music may not stop for a while in the space, but the shares aren't cheap.

I had a finance professor as an undergrad who liked to say “math works”, and when it comes to the math on semiconductor capex, the math still works for Tokyo Electron (OTCPK:TOELY) (8035.T) (“TEL”). New demand from end-markets like autos, consumer, data center, industrial, medical, and wireless is likely to drive at least mid-single-digit chip volume growth over the next decade, and increasing production complexity means ever-higher capital intensity.

TEL also has credible opportunities to continue gaining share in its core semiconductor production equipment (or SPE) markets, while also driving further progress in margins, with management targeting 30%-plus operating margins when it reaches JPY 2T in revenue.

Where the math stops working for me is valuation. I realize we’re in a bullish cycle for SPE capex spending and that drives higher multiples, but the stock really doesn’t work on a GARP basis. That’ll be fine for some investors, and I do certainly understand using Tokyo Electron as a play on ongoing capex spending growth, but I’ve too many cycles in this sector to want to play the game of musical chairs.

Market Growth, With Market Share Growth On Top Of That

While demand has certainly accelerated in this post-pandemic recovery, it’s not as though the semiconductor or semiconductor equipment markets had been suffering in recent years. Between overall increased consumption (“more stuff”), increasing chip content in a number of markets (“more chips per stuff”), and increasingly capex-intense production methods, the market for SPE has grown at a mid-teens annualized rate since 2015.


As one of the leading players, TEL has benefitted from this strong underlying market growth, and the company has helped its own cause – leveraging R&D to modestly outgrow the market by around 1% to 2% a year, depending on whether you include lithography.

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This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (3)

Very very appreciated your work.
Wondering can you give more explain on how TEL is leveraged to the ongoing adoption of EUV at advanced nodes?
Thank you
Just want to say, I'm a huge fan of your work. I like that your analysis describes the strengths of the company, while also explaining how the current valuation can be expected to impact future returns. But you must be a bot, I have no idea how you manage to be so prolific. Cheers!
Stephen Simpson profile picture
@fiiyah Thank you very much! Seeking Alpha probably doesn't make it easy to see this, but my work tends to be in bursts. So, for now, I'm in the middle of one of those productive streaks.
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