DISCO’s demand base broadens; Goldman Sachs backs expansion and reiterates Buy

What additional support does equipment demand have compared with one or two years ago?

DISCO said at its second-quarter earnings briefing that, compared with one or two years ago, strong demand has broadened across applications, with no marked divergence among them. Growing generative AI demand is encouraging outsourced semiconductor assembly and test providers (OSATs) to invest more in equipment, and the company has also received equipment inquiries for new wafer fab projects in the United States.
The broadening of demand has affected production arrangements: increased shipments of blade dicing machines are an important reason the company has dispatched additional production support staff from headquarters. This has broadened the sources of support for the current demand cycle from specific advanced packaging applications to more customers and equipment uses.
Consumables also benefit from both product mix and pricing. An increase in high-value-added products used in front-end wafer processing environments has raised average selling prices, driving consumables sales and earnings; growth is therefore not solely dependent on volumes.

Addressing investor concerns about adjustments to HBM layer counts and lower specifications, management reiterated that customers remain keen to purchase DISCO equipment. One key reason the company gave is that total HBM wafer volumes have increased significantly, supporting equipment demand.
The company expects equipment used for 2.5D packaging of HBM memory and logic chips to achieve similar growth rates; equipment demand for peripheral components such as multilayer ceramic capacitors (MLCCs) and power semiconductors is also expanding. Goldman Sachs’s positive assessment is therefore based on support from multiple applications.

DISCO is simultaneously adding production support staff, hiring experienced employees and fixed-term contract workers, and shortening equipment production cycle times. Capacity expansion depends on both additional personnel and improved production efficiency.
Some investors worry that the contribution of the latest staff increases to shipment growth will be weaker than in the past. Goldman Sachs cited the experience during the pandemic: the company then used less experienced employees to support production, yet shipment value still grew by about 50% over several quarters. It therefore believes the current skill level of engineers is unlikely to slow subsequent capacity expansion.
Materials present a clear constraint: the company acknowledges that it has limited room to procure additional supplies, but believes materials are unlikely to become a bottleneck for capacity expansion, based on the trust it has built with suppliers. Goldman Sachs’s optimistic assessment assumes that supply can keep pace with increased production.

Goldman Sachs believes market consensus earnings estimates are likely to be raised further and reiterated its Buy rating. Its rationale is that the demand base has broadened, while personnel and materials are not currently regarded as major obstacles to capacity expansion.
Goldman Sachs’s 12-month price target is 105,000 yen, based on estimated EBITDA for the fiscal year ending in March 2028: it applies the global semiconductor production equipment industry’s average EV/EBITDA of 18 times, then adds a 50% premium for DISCO’s high profitability.
The price target depends both on earnings growth and on high profitability sustaining the valuation premium. The main downside factors Goldman Sachs lists include a slowdown in AI-related demand, weaker demand in China or tighter export controls, yen appreciation against the US dollar, and market-share losses and margin deterioration.