For the fiscal year ending March 31, 2024, Tokyo Electron Limited (OTCPK:TOELY) ("TEL") reported consolidated net sales of ¥1,830.5 billion ($16.6 billion USD), reflecting a decline from the previous year's net sales of ¥2,553.3 billion. Despite this reduction, the company maintained strong profitability. The operating income for the same period was ¥422.1 billion ($3.8 billion USD), reflecting a solid operating margin of 23%.
Tokyo Electron is one of the leading semiconductor equipment companies, with a leading market share in several processing equipment sectors, and third only to ASML Holding N.V. (ASML) and Applied Materials, Inc. (AMAT) in global revenues. Shown in Chart 1 are TEL's revenues by fiscal year ending March.
Even though its percentage of sales for Etch system dropped in FY24, it still maintains a dominant 55% share of Dielectric Etch (ahead of Lam Research Corporation (LRCX) at 29%), according to The Information Network's report entitled Global Semiconductor Equipment: Markets, Market Shares and Market Forecasts.
Although TEL led the Dielectric Etch market in CY 2023, it lost 611 bps to LRCX. TEL has hopes to regain share in 2025 with the introduction of cryotech equipment capable of producing memory channel holes in advanced 3D NAND devices with a stack of over 400 layers.
However, TEL neglected to state in its press release that LRCX already has a cryotech technology, which is why it has been dominating the NAND etch business. According to Lam's CEO Timothy Archer:
"In etch, Lam is using high aspect ratio cryogenic etch to enhance productivity of memory hole formation. Today, we are approaching 1,000 Cryo Etch chambers in our high-volume manufacturing installed base. In partnership with our customers, we're using the tremendous amount of data coming from this installed base to rapidly improve technology and cost at each successive layer transition in NAND."
Chart 1
Chart 2 compares YoY and QoQ revenues for the Top 7 companies reported in Q1 2027. Not only did TEL's revenue drop 18.9% YoY in FY 2024, for CY Q1 2024 (FQ4 2024), revenues decreased 13.8% YoY but increased 17.4% QoQ.
In fact, TEL demonstrated the second largest QoQ growth (to Japan's Screen Holdings) in Q1 2024, and the greatest recovery spread among the seven companies comparing YoY vs QoQ growth. The two Japanese companies showed the greatest QoQ growth among the Top 7 companies.
Chart 2
Chart 3 illustrates revenue growth of all Japanese equipment companies and the correlation with Chart 2 in which the two Japanese companies showed the greatest growth.
Chart 3
Comparing Growth by Equipment Type
In a comparison of Revenue by Major Equipment Type, TEL, AMAT, and LRCX compete with each other in two sectors - Etch and Deposition.
In the etching equipment sector, where I combine Dielectric and Conductive etch:
- Tokyo Electron has reported a market share of 28% in CY 2023.
- LRCX, with a strong share in both sectors, held a 39% share, while
- AMAT held a 22% share.
Deposition equipment is more complicated to compare because it encompasses several different types of equipment. The two major segments are PVD and CVD, but CVD is further segmented into ALD, PECVD, and LPCVD (tube and non-tube). AMAT has a dominant share of the PVD market but a minimal share in ALD. TEL is a dominant player in ALD but does not compete in the PVD market.
One segment all compete is Low-Pressure Chemical Vapor Deposition (LPCVD) Non-Tube. The "non-tube" variant refers to equipment designed for processes that do not utilize traditional tube furnaces. Instead, these systems often employ more advanced chamber designs that can offer better uniformity and control, essential for modern semiconductor fabrication, especially as device geometries continue to shrink.
In the non-tube CVD segment, 2023,
- TEL led the market with a 39% share, slightly ahead of
- LRCX with a 38% share, and ahead of
- AMAT with a 23% share.
2024 Forecast and Impact of China Sales in 2023
TEL's President and CEO Toshiki Kawai noted in the company's Q4 2024 Earnings Call on May 10, 2024:
"Calendar 2024 WFE market is expected to be $100 billion in size. We expect that investment for leading-edge DRAM will start to recover from late 2024, driven by growing demand for DDR5 and HBM, among others."
To illustrate the expected growth, in 2023 WFE was $97.5 billion, meaning growth of 2.6%. I noted in my March 4, 2024, Seeking Alpha article entitled "Applied Materials' WFE Market Share Plummets 5% Below ASML In 2023."
"For 2024 I see a recovery of WFE revenues, which dropped double digits in 2023, but because of pull-ins from 2024, primarily by Chinese semiconductor companies, this recovery won't happen until 2H 2024."
Table 1 shows equipment revenue from China and the percentage of these revenues to total global revenues between Q1 2023 and Q1 2024. In 2H 2023, revenues doubled from 1H 2023 as Chinese semiconductor companies began hoarding foreign equipment in anticipation of more aggressive sanctions by the U.S. Government. AMAT had the largest percentage of revenues from China. Chinese customers' investment for mature nodes was active throughout the year, based on sanctions that limited nodes to greater than 16nm, as funding for capacity enhancement of mature nodes was accelerated.
There is no correlation between the percentage of sales to China and global YoY or QoQ growth.
Investor Takeaway
Outlook
In CY 2025, capital investment is projected to fully recover for NAND and advanced logic/foundry, following the earlier rebound in DRAM. A key driver of this growth is the AI server market, which is experiencing an annual growth rate of 31%. Additionally, AI technology will be integrated not only into servers but also into PCs and smartphones. Servers are expected to grow by 32% on an annual basis; PCs are expected to grow by 14%, and smartphones are expected to grow by 15% on an annual basis up to CY 2025.
These factors are expected to propel the wafer fabrication equipment (WFE) market to achieve double-digit growth in 2025. Chapter 2 shows the forecasted change in WFE spend by Chip Type.
According to TEL's FY 2024 Earnings Presentation in Chart 4, the bulk revenues are in the non-memory sectors. As was shown above in Table 2, in 2025 I expect all WF sectors to exhibit double-digit YoY growth except for Logic at 8.5%, but that is due to the underperformance of Intel Corporation (INTC), the largest logic company.
Chart 4
Share Price Comparison
On a competitive basis, TEL maintains a dominant share of Dielectric Etch ahead of Lam Research, a 90% share of resist coating required with ASML systems, and is the #3 company in the global semiconductor industry behind AMAT and ASML. Share price performance when compared with competitors AMAT and LRCX is shown in Chart 5.
TEL started a breakout from competitors in early February 2024, but in mid-April, Tokyo Electron's stock price experienced a significant decline.
Chart 5
TEL is oversold, and I rate the company a Buy.
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