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Morningstar | Tokyo Electron Facing Similar Headwinds as Peers; We Expect Memory Spending to Improve in 2020

Tokyo Electron is a key vendor of semiconductor fabrication tools, operating primarily in the etch, deposition, and clean segments, which involve adding and removing materials to and from semiconductor wafers, respectively. We believe Tokyo Electron's relatively diverse product portfolio will allow it to comfortably weather business cycles over time, allowing the firm to maintain its current research and development levels and experience decent growth over the long term, thus justifying a narrow economic moat.Chipmakers that pursue the tenets prescribed by Moore’s law have endured significant challenges in terms of cost and complexity. Equipment providers are vital to making the pursuit more economical via superior tools that can define ever-shrinking feature sizes, including transistors and memory cells. Customers include leading-edge chip manufacturers in the logic, foundry, and memory spaces that require advanced process equipment supplied by the likes of Tokyo Electron. Tokyo Electron has benefited from the sharp rise in etch, deposition, and clean steps required due to major inflections including 3D transistors and 3D NAND memory. Consequently, Tokyo Electron is poised to experience solid growth, as we expect the segments it focuses on to capture a larger share of fabrication equipment spending.The company’s scale and resources allow a large research and development budget, averaging JPY 75 billion over the last five years, to serve cutting-edge technologies. In order for Tokyo Electron to continue to do so, it must outspend smaller chip equipment firms in research and development to develop relevant machines that generate sufficient revenue, nearly JPY 800 billion in fiscal 2017. We think Tokyo Electron has sufficient scale to fare well in the industry but note the presence of formidable competitors like Applied Materials and Lam Research. Meanwhile, the volatile nature of demand for semiconductors directly affects the cyclicality of the equipment market.