DISCO maintained at Outperform, with silicon photonics becoming a new growth driver

Overview

This report is Bernstein's update on Disco Corp (6146.JP) following its 1Q FY27/3 results and Q2 guidance. The report believes the company's Q2 shipment guidance is strong, HBM demand remains ongoing, and silicon photonics is beginning to emerge as a new growth source; after raising earnings forecasts, it maintains the Outperform rating and lifts the target price to ¥99,000.

Core views

The core views include: first, Q2 shipment guidance of ¥141.0bn is significantly above consensus expectations, showing demand resilience; second, HBM remains the main demand source, and while silicon photonics is smaller than HBM and CoWoS, it is contributing incremental growth; third, improved consumables margins support high gross margin; fourth, an improved semiconductor market outlook together with new drivers such as D2W hybrid bonding, V10 NAND, and SiPh leads to upward revisions in FY27/FY28 revenue and profit forecasts.

Analysis framework

The report is structured around quarterly results, company guidance, Bernstein forecasts, and comparisons with market consensus, breaking down revenue, shipments, gross margin, operating margin, application mix, and regional sales performance, and deriving the target price using forward EPS and P/E multiples.

Methodology notes

• Valuation methodsP/E multiple valuation

  40x forward Q5-Q8 EPS

  The target price of ¥99,000 is based on projected EPS for future Q5-Q8 and calculated using a 40x P/E multiple. The report keeps the valuation multiple unchanged, and the target price increase mainly comes from upward earnings revisions.

Asset mapping & comparison

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

• Disco Corp (6146.JP)

  Core covered name

  Strengths

  Continued HBM demand, strong Q2 shipment guidance, improved consumables margins, and emerging new demand sources such as silicon photonics.

  Weaknesses

  Some Q1 shipments were below preliminary expectations, and Q2 revenue and operating profit guidance are still below Bernstein's forecasts and market consensus expectations.

  Comparison

  Compared with consensus expectations, Bernstein is more optimistic on FY27/3 and FY28/3 revenue, operating profit, and EPS forecasts.

  Risks

  AI-related excess capacity, changes in the competitive environment, and unfavorable currency fluctuations could compress valuation multiples and profitability.

• Japan semiconductor equipment chain

  Industry mapping

  Strengths

  HBM, advanced packaging, D2W hybrid bonding, V10 NAND, and SiPh capital expenditure may drive equipment demand.

  Weaknesses

  Demand may still be affected by the end-market AI investment cycle and the pace of China OSAT investment.

  Comparison

  DISCO has high sensitivity to advanced packaging and high-end memory demand in the dicing, grinding, and consumables segments.

  Risks

  If AI hardware investment cools or customer capital expenditure declines, equipment orders and shipments may come under pressure.

Key data

• 1Q FY27/3 revenue¥114.3bnUp 27.1% year over year, 1.1% above market consensus.
• 1Q FY27/3 shipments¥135.9bnUp 22.3% year over year and 12% quarter over quarter; slightly above Bernstein and consensus expectations.
• Q2 FY27/3 shipment guidance¥141.0bnAbove the consensus expectation of ¥131.1bn, up 4% quarter over quarter.
• 1Q FY27/3 gross margin71.3%Above the company's guidance of about 69%, and also above the 70.5% consensus expectation.
• 1Q FY27/3 operating margin42.9%Above the company's guidance of 39.6%, and basically in line with the 43.0% consensus expectation.
• FY27/3 revenue forecast¥578.5bnRaised 2.7% versus the previous forecast, 6.3% above consensus expectations.
• FY28/3 revenue forecast¥727.2bnRaised 8.6% versus the previous forecast, 14.8% above consensus expectations.
• Target price¥99,000Raised from the previous target price of ¥85,000, implying 43% upside.

Impact & implications

The investment implication conveyed by the report is positive: strong guidance and high margins indicate that DISCO continues to benefit from advanced packaging, HBM, and a recovery in semiconductor capital expenditure; if silicon photonics continues to ramp, it could become a new growth curve following HBM and CoWoS. From a valuation perspective, the target price increase comes from improved earnings forecasts rather than multiple expansion, so the key question is whether shipments and margins over the next few quarters can validate this.

Risks

• If AI-related capacity such as GPUs and HBM becomes oversupplied, valuation multiples may contract and profitability may decline.
• Changes in the competitive environment may affect DISCO's market share or pricing power.
• Unfavorable currency fluctuations may create downside risk to revenue.
• A slowdown in China OSAT investment may affect shipments in certain application areas.

What to watch

• Whether actual Q2 FY27/3 shipments reach or exceed the ¥141.0bn guidance.
• The sustainability of HBM demand and changes in the share of memory business within the shipment mix.
• Silicon photonics-related revenue sources, including D2W hybrid bonding, laser semi, and optical modules/transceivers.
• Whether the improvement in consumables gross margin can continue into Q2 and subsequent quarters.
• Whether the upward revisions to FY27/3 and FY28/3 revenue, operating profit, and EPS can be validated by subsequent orders and margins.