Goldman Sachs Upgrades Kioxia to Buy: AI-Driven High Profitability Cycle Extended for NAND

Overview

Goldman Sachs released a research report, upgrading the rating of pure NAND flash manufacturer Kioxia Holdings (Kioxia Holdings, 285A.T) from "Neutral" to "Buy", and significantly raising the 12-month target price from 48,000 Yen to 93,000 Yen, implying an upside of approximately 41%. While Goldman Sachs maintains the view that the NAND market is cyclical, it believes that against the background of strong AI server demand and limited supply growth, the peak profit level of this cycle will be significantly higher than before, and the high profitability status is expected to remain sustainable over the next 2-3 years (until FY2029).

Core views

Core View 1: Supply and Demand Imbalance Driven by AI Extends High Profitability Cycle. Although the NAND industry structure remains unchanged (still 6 major players), AI applications (especially inference servers) have seen a surge in demand for temporary storage, while recent supply increases are limited. Goldman Sachs expects supply-demand tightness to persist until 2028, reducing the likelihood of price crashes and corporate losses common in past downturn cycles over the next 2-3 years. Core View 2: Competitor Strategic Focus Shift Limits NAND Supply. Major memory manufacturers such as Samsung, SK Hynix, and Micron produce both DRAM and NAND. Since DRAM/HBM demand is expanding and margins are higher, these companies allocate cleanroom space for new wafer fabs primarily to DRAM. Data shows significant expansion in DRAM equipment demand, while NAND equipment demand remains low, meaning NAND supply growth will be constrained in the short term. Core View 3: Kioxia's Own Cost and Supply Chain Risks Ease. Concerns about procurement risks and rising costs for DRAM needed for enterprise SSDs (eSSD) have eased. Through its March announcement to invest in Nanya Technology, Kioxia locked in DRAM supply for the coming years. DRAM cost upward pressure is expected to gradually decrease from the second half of 2027. Meanwhile, the company's transition to the more cost-competitive eighth-generation BiCS (BiCS 8) technology is smooth, with unit bit costs gradually decreasing. Core View 4: Earnings Forecast Significantly Revised Upward. Based on the new supply-demand model, Goldman Sachs revised the forecast for Kioxia's 2026 calendar year average selling price (ASP) growth from 3.8x to 4.3x, and 2027 growth forecast from 4% to 27%. Accordingly, operating profit forecasts for FY3/27-29 were raised by 16%, 46%, and 48% respectively. The company is expected to maintain a high gross profit margin of around 80% during the FY3/27-FY3/29 period, far exceeding Bloomberg consensus estimates (over 30% higher). Core View 5: Valuation Restructuring Logic. Although NAND industry historically experienced drastic cyclical fluctuations with a median full-cycle operating margin of only 10%, Goldman Sachs believes Kioxia's operating margin in this cycle will stabilize near 80%, and the full-cycle operating margin may exceed 60%. Given significantly improved profitability, P/E multiples willing to be granted by the market at cycle peaks should correspondingly increase. The current implied FY3/28 P/E is 7.8x, up from the 4-5x tolerated by the market in past downturn cycles, but still below peer levels, leaving room for revaluation.

Analysis framework

Goldman Sachs' analysis approach mainly follows a path combining "Industry Supply-Demand Framework" with "Company Fundamentals Comparison". Firstly, analyzing the NAND market supply-demand balance from a macro perspective, pointing out structural supply shortages caused by surging AI demand and competitor capacity allocation strategies (favoring DRAM over NAND), which forms the basis for supporting price increases and profitability sustainability. Secondly, deeply evaluating Kioxia's unique advantages compared to competitors at the micro company level, including manufacturing economies of scale brought by its joint venture with SanDisk, cost competitiveness of BiCS 8 technology, and strategic initiatives to solve DRAM supply chain bottlenecks through investment in Nanya Technology. Finally, at the valuation level, Goldman Sachs did not simply adopt historical low P/E multiples, but combined significantly improved profitability quality (high and stable operating margins) to argue the logic for reasonable multiple upward revision, and pointed out via horizontal comparison with peer SanDisk that the valuation discount currently existing for Kioxia is likely to converge.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Supply-Demand Framework

  The research report analyzes the demand increment brought by AI servers and the NAND supply constraint caused by competitors prioritizing investment in DRAM, concluding that the NAND market will experience continuous supply shortage, thereby supporting prices and profits. This is a typical method of predicting industry prosperity through supply-demand gaps.

• Competition & Strategy Framework

  Capital Expenditure Priority & Capacity Constraint Analysis

  The report analyzed capital expenditure allocation strategies between DRAM and NAND among multi-product giants like Samsung and SK Hynix. Since DRAM has higher margins, giants allocated limited cleanroom space primarily to DRAM, passively limiting NAND supply growth. This analysis reveals the resource crowding effect between product lines in oligopolistic markets.

• Valuation MethodPB valuation

  PB Valuation

  Goldman Sachs explicitly states that its target price is calculated based on target Price-to-Book (P/B) ratios, where the target P/B is derived from average expected ROE and implied equity cost. This reflects a valuation method using the relationship between Return on Equity and P/B ratio during high profitability cycles.

• Company Fundamentals & Financial FrameworkOperating/Financial Leverage Analysis

  Operating Margin (OPM) Cyclical Analysis

  The report compares the median operating margin of NAND vendors in historical cycles (around 10%) with the predicted full-cycle operating margin of over 60% in this cycle, pointing out that the structural change in profitability quality is the core basis for valuation restructuring.

Asset mapping & comparison

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

• Kioxia Holdings (285A.T)

  Beneficiary Target. As a pure NAND flash manufacturer, directly benefits from the surge in NAND demand brought by AI servers and price increases caused by industry supply constraints.

  Strengths

  Possesses large-scale cleanroom space in Kitakami City, Iwate Prefecture, possessing flexible production capacity elasticity; Joint venture with SanDisk brings manufacturing economies of scale; BiCS 8 technology possesses cost competitiveness; Stabilized DRAM supply chain through investment in Nanya Technology.

  Weaknesses

  Compared to diversified giants like Samsung and SK Hynix, the product line is single, relatively weaker risk resistance; Historically traded at a discount to SanDisk.

  Comparison

  Compared to SanDisk, Kioxia valuation is lower, but business characteristics are similar, report considers the large divergence in valuations is abnormal, Kioxia has catch-up space. Compared to Samsung/SK Hynix, Kioxia is not affected by DRAM capacity squeezing, can respond more flexibly to NAND demand.

  Risks

  AI investment slowdown; Competition intensification from Chinese vendors (such as YMTC) share increase; Large appreciation of Yen; Weak non-AI application demand.

Key data

• Target Price93,000 YenSignificantly raised from 48,000 Yen
• RatingBuyUpgraded from Neutral
• 2026 ASP Growth Forecast4.3xPrevious forecast was 3.8x
• 2027 ASP Growth Forecast+27%Previous forecast was +4%
• FY3/27-29 Operating Profit Upward Revision16%/46%/48%Significantly upgraded earnings forecast
• Forecasted Gross MarginAround 80%Expected to maintain high levels during FY3/27-FY3/29
• Implied FY3/28 P/E Multiple7.8xConsidered reasonable relative to peers
• China YMTC Market Share11%Large increase from 4% in 2024, constitutes potential supply threat

Impact & implications

The report considers that Kioxia is in a profitability phase different from previous cycles. As NAND demand driven by AI continues to be strong, and major competitors are constrained from increasing NAND supply significantly due to DRAM capacity expansion, Kioxia as a pure NAND vendor will fully benefit from simultaneous volume and price increases. In addition, the release of supply chain risks and the introduction of new technologies will further consolidate its cost advantages. This means Kioxia's market value has the potential to break through 5 trillion Yen, and investors should pay attention to its valuation revaluation process from high cyclicality to high profitability sustainability.

Risks

• AI investment centered on hyperscale data centers slows down, potentially easing NAND supply-demand balance and pressuring prices.
• Chinese NAND vendors (such as YMTC) market share rises from 4% to 11% and continues capacity expansion, posing threats to future global supply-demand and market share.
• Further increase in component procurement costs (such as DRAM) or decrease in equipment utilization rates may compress profit margins.
• Large appreciation of Yen against USD (Report assumes exchange rate of 155 Yen/USD, every 1 Yen change affects quarterly operating profit by approx. 9 billion Yen).
• Non-AI application (such as consumer electronics) NAND demand weakens due to price elasticity, leading to eased supply-demand balance.

What to watch

• Investor Relations Day held on June 2nd, watch NAND market bit growth outlook, capital expenditure, shareholder return strategy, and long-term agreement (LTA) negotiation progress.
• First Quarter Fiscal Year 2027 quarterly earnings report, verifying whether operating profit runs ahead of expectations (Goldman Sachs forecasts Q1 operating profit 1.38 trillion Yen, higher than guidance of 1.298 trillion Yen).
• Quarterly reports of competitors and major customers such as Apple and Dell, confirming whether NAND prices continue to rise in Q2 2027.