Goldman Sachs: Japanese semiconductor equipment enters an earnings revision cycle, but room for valuation expansion is limited

Overview

This report presents Goldman Sachs' 2H CY26 investment strategy for Japan's semiconductor capital equipment industry. It notes that stronger AI semiconductor demand has increased the capital spending appetite of major semiconductor manufacturers, driving significant increases in equipment demand and related stock valuations. Although much of the expected equipment demand growth from CY26 to CY27 has been reflected in share-price and valuation gains over the past approximately six months, Goldman Sachs expects the CY27 WFE market to grow 32% year over year, faster than in CY26, leaving room for further upward revisions to FY27-FY28 sector earnings expectations.

Core views

The core view is that the sector remains in an earnings revision cycle, but valuations are already above historical ranges, making it more difficult to generate returns through further valuation multiple expansion. Investment focus should shift from “industry upcycle” to “stock-specific earnings outperformance.” Goldman Sachs prefers companies capable of achieving above-industry-average sales growth through technological changes, proprietary technologies, or market-share gains, while translating revenue growth into meaningful margin improvement. The report maintains Buy ratings on Lasertec, Ebara, Disco, and Tokyo Electron, and resumes coverage of Kokusai Electric at Neutral from previously unrated.

Analysis framework

The report combines upward revisions to capital spending forecasts by major memory manufacturers such as Samsung and Micron, published trade statistics, company earnings forecasts, market consensus expectations, the relationship between EV/EBITDA valuations and margins, and each company's technology and product exposure to form a top-down industry view and conduct bottom-up stock selection.

Methodology notes

• Valuation methodsEV/EBITDA and margin correlation analysis

  Compare FY27 forecast EBITDA margins with current EV/EBITDA multiples for SPE companies to assess valuation reasonableness.

  The report believes semiconductor equipment companies' margins and valuation multiples show a clear correlation. Therefore, after valuations have risen significantly, companies whose earnings and margins continue to outperform expectations are more likely to achieve share-price upside.

• Stock selection frameworkEarnings surprise screening

  Focus on whether sales growth exceeds the sector average and whether revenue growth can deliver meaningful margin improvement.

  The report uses technological changes, proprietary technologies, market-share gains, and margin leverage as two key criteria for stock recommendations.

• Goldman Sachs internal frameworkGS Factor Profile

  Compare stock characteristics across growth, financial returns, valuation multiples, and composite percentiles.

  The disclosure section explains that GS Factor Profile uses Goldman Sachs forecasts to calculate sales, EBITDA, and EPS growth; ROE, ROCE, and CROCI; and valuation metrics such as P/E, P/B, and EV/EBITDA, for comparison of individual stocks with the market and industry peers.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Lasertec (6920.T)

  Buy-rated, benefiting from key-customer capital spending and new-product contributions.

  Strengths

  Orders are expected to grow above market consensus, benefiting from increased capital spending appetite at key customers including TSMC, Intel, and Samsung, as well as the full contribution of A200HiT from FY6/27.

  Weaknesses

  The share price and expectations have already risen with the sector, requiring further delivery on orders and earnings.

  Comparison

  Listed as one of the key Buy ideas for 2H CY26.

  Risks

  If customer capital spending or new-product contributions fall short of expectations, the earnings-outperformance thesis could weaken.

• Ebara (6361.T)

  Buy-rated, with catalysts from potential guidance upgrades and margin improvement.

  Strengths

  The precision machinery business provides relatively high visibility for FY12/26 guidance to exceed expectations, and the next results confirmation could become a share-price catalyst.

  Weaknesses

  Some annual earnings upgrades are relatively modest.

  Comparison

  Listed as one of the key Buy ideas for 2H CY26.

  Risks

  If precision machinery orders or margins disappoint, the catalyst could be delayed.

• Disco (6146.T)

  Buy-rated, driven by technological changes in advanced packaging.

  Strengths

  Shipment momentum is expected to recover from 2Q, benefiting from technological changes in HBM, CoWoS, EMIB-T, hybrid bonding, CPO, and other advanced packaging technologies.

  Weaknesses

  The target-price increase primarily reflects the forward shift of the valuation base year, while earnings forecast adjustments are relatively limited.

  Comparison

  Listed as one of the key Buy ideas for 2H CY26.

  Risks

  If advanced packaging demand or shipment timing falls short of expectations, earnings leverage will be affected.

• Tokyo Electron (8035.T)

  Buy-rated, with potential for sales growth above WFE and margin improvement.

  Strengths

  The report believes it still has a high probability of exceeding market-consensus earnings, benefiting from sales growth above WFE market growth and margin improvement.

  Weaknesses

  The market already has high expectations for equipment price increases to improve margins.

  Comparison

  The target price was raised substantially, from ¥62,000 to ¥83,000.

  Risks

  If price increases, orders, or margin improvement fall short of elevated expectations, the valuation premium could come under pressure.

• Kokusai Electric (6525.T)

  Coverage resumed at Neutral, with a broadly balanced risk-reward profile.

  Strengths

  The FY3/27 operating profit forecast is significantly above company guidance, and DRAM-related demand gives a relatively high probability of a guidance upgrade.

  Weaknesses

  It has relatively high exposure to NAND sales and profit contribution, while major memory manufacturers continue to prioritize DRAM and HBM investment. Its focus on large-batch equipment in DRAM and logic/foundry may limit achievement of margin targets.

  Comparison

  Valuation is close to Tokyo Electron's but margins are slightly lower; the report does not consider it inexpensive.

  Risks

  NAND capital spending recovery may be slower than expected, or China's equipment demand may show limited upside; expectations for a guidance upgrade have also largely been reflected in the share price.

• Advantest (6857.T)

  Neutral-rated, with strong AI semiconductor test demand but insufficient catalysts for further upgrades.

  Strengths

  Demand for AI semiconductor testers is strong, and the company's early capacity expansion has lifted earnings expectations.

  Weaknesses

  The report sees a lack of catalysts for a further significant increase in expected GPU/ASIC testing time, while the CPU market is also unlikely to reach the scale of the GPU/ASIC market.

  Comparison

  Compared with Buy-rated names, room for further earnings-expectation upgrades is relatively limited.

  Risks

  If the market has already priced in overly high earnings expectations, share-price sensitivity may be constrained.

• SCREEN Holdings (7735.T)

  Sell-rated, with challenges to margin improvement.

  Strengths

  There is potential for an upward revision to guidance for 2H FY3/27.

  Weaknesses

  A declining sales mix from emerging Chinese customers and accelerated fixed-cost investment for future growth create an unfavorable environment for margin improvement.

  Comparison

  The report maintains its Sell view even after raising the target price.

  Risks

  If orders or earnings fall short of expectations, valuation could face further pressure.

• Tokyo Seimitsu (7729.T)

  Sell-rated, with risks that near-term orders and earnings may fall short of expectations.

  Strengths

  The target price was raised from ¥14,000 to ¥15,000.

  Weaknesses

  HBM probe-card equipment depends on specific customers, potentially weakening near-term order momentum; logic probe-card equipment faces intensifying OSAT competition.

  Comparison

  Compared with Buy-rated names, visibility for earnings outperformance is lower.

  Risks

  1Q orders and earnings may fall below market expectations.

Key data

• Year-to-date share-price performance of 10 covered SPE companies+65%Significantly outperformed the TOPIX's +17% gain over the same period.
• Goldman Sachs forecast for CY27 WFE market growth+32% yoyExpected to exceed CY26 growth and drive further upward revisions to FY27-FY28 earnings expectations.
• Target-price adjustmentAverage increase of 16%Across 10 covered SPE companies, reflecting higher capital spending expectations, trade statistics, and the forward shift of the valuation base year.
• Kokusai Electric 12-month target price¥9,500Coverage resumed at Neutral; target price is based on applying 18X EV/EBITDA to FY3/28 earnings estimates.
• Kokusai Electric FY3/27 operating profit forecast¥70.1 bnAbove the company's ¥54.5 bn guidance; the report believes the likelihood of a full-year guidance increase at the 1Q results is relatively high.
• Disco 12-month target price¥95,000Raised from ¥87,000, reflecting the forward shift of the valuation base year to FY3/28E.
• Ebara 12-month target price¥7,800Raised from ¥7,100, while lowering the FY12/27E cost-of-equity assumption to 4.0%.
• Tokyo Electron 12-month target price¥83,000Raised from ¥62,000, reflecting the forward shift of the FY3/28E valuation base and a higher premium from improved earnings power.

Impact & implications

For portfolios, the report supports continued participation in the Japanese semiconductor equipment earnings-revision theme, but does not recommend simply chasing sector valuation expansion. More attractive areas include leaders or niche companies benefiting from AI, HBM, advanced packaging, front-end processing, and key-customer capital spending. At the same time, investors should remain disciplined toward companies whose valuation already fully reflects upgraded expectations, whose NAND recovery remains insufficient, or whose near-term orders may fall short of expectations.

Risks

• Sector share prices and valuations have risen significantly, leaving limited room for further valuation multiple expansion.
• Capital spending related to AI, HBM, DRAM, or advanced packaging falling short of expectations would weaken equipment demand growth.
• NAND capital spending recovery still lacks momentum, affecting companies with high NAND exposure such as Kokusai Electric.
• Upside in Chinese equipment demand may be only slightly above company guidance and may not be sufficient to support higher valuations.
• Individual companies face risks from customer concentration, insufficient order momentum, intensifying competition, or rising fixed-cost investment.

What to watch

• Subsequent changes in capital spending guidance from major memory manufacturers such as Samsung and Micron.
• Whether CY26-CY27 WFE market growth materializes, particularly whether CY27 reaches Goldman Sachs' forecast of +32% yoy.
• Revisions to orders, revenue, margins, and full-year guidance in each company's 1Q or next earnings release.
• Shipment momentum for equipment related to HBM, CoWoS, EMIB-T, hybrid bonding, CPO, and other advanced packaging technologies.
• Whether NAND capital spending enters a broad-based recovery and whether priorities shift between DRAM and HBM.
• The degree of alignment between SPE companies' EV/EBITDA multiples and margin improvement.