NEC Boosts IT Service Productivity with AI Tools, Goldman Sachs Maintains Buy Rating

Overview

This report is based on minutes from NEC management's annual meeting with sell-side analysts, with the core conclusion being that NEC's comprehensive adoption of AI-driven development tools will significantly enhance IT service productivity, becoming a key driver for future earnings growth. Goldman Sachs maintains a Buy rating with a target price of ¥5,200, believing the company's medium-term earnings growth will exceed industry averages and valuation remains attractive.

Core views

NEC publicly discussed AI-driven development (applying AI tools to system integration processes) for the first time during the meeting, showing initial results in areas like reverse engineering. The company plans to increase internal use of Anthropic's AI tools through strategic collaboration, expected to improve labor productivity, increase project volume, and reduce outsourcing costs. Goldman Sachs believes that while AI-driven development in Japan's IT services industry remains in early stages, leading companies are already contributing profits, and NEC's progress and earnings growth potential may exceed expectations. Medium-term earnings drivers include legacy system modernization projects under DX trends and robust orders in aerospace & national security businesses. On valuation, Goldman Sachs assigns IT services business 24-25x P/E (30% premium to industry average of 19x) and hardware business 21x P/E, weighted by sales (IT services 90%, hardware 10%) to derive the target price. The premium reflects expected medium-term earnings growth outperformance, benefiting from core system demand growth, low-margin project improvements, and structural expansion in defensive businesses.

Analysis framework

Goldman Sachs uses sum-of-the-parts (SOTP) valuation, separating NEC's businesses into IT services and hardware with different P/E multiples, then weighting by sales to calculate target price. This method is commonly used for diversified companies to better reflect segment values. Industry average P/E comparisons combined with earnings growth expectations determine premium levels, reflecting relative valuation logic.

Methodology notes

• Valuation MethodSOTP Valuation

  Valuing different business segments separately then summing

  Goldman Sachs values NEC's IT services and hardware businesses separately with different P/E multiples then weighted average, suitable for diversified companies to accurately reflect segment values.

• Valuation MethodPE/PEG valuation

  Valuation based on P/E and earnings growth expectations

  Report uses target P/E (24x) multiplied by expected EPS to derive target price, with premium determined through industry average P/E comparison, reflecting growth expectation differences.

Key data

• 12-month Target Price¥5,200Based on FY3/27 expected EPS ¥216 and 24x P/E
• FY3/27 Expected EPS¥216Goldman Sachs forecast
• IT Services Business P/E24-25x30% premium to industry average 19x
• Hardware Business P/E21xMajor electronics company industry average
• Current Price¥4,163As of May 18, 2026 close

Impact & implications

Goldman Sachs views NEC's AI-driven development progress as potentially setting a leading example in Japan's IT services industry. If productivity improvements materialize, they could drive margin enhancements and revenue growth. For the industry, leading companies' AI adoption may accelerate sector-wide productivity transformation, though acceptance among clients/subcontractors and competitive landscape changes warrant monitoring.

Risks

• Declining corporate IT investment appetite
• Weak telecom operator capex
• Shift toward overseas products
• Loss-making project emergence

What to watch

• Progress in internal AI tool adoption and productivity improvements
• FY3/27 earnings contribution timeline
• Sustainability of aerospace & national security business orders
• Low-margin project improvement status