Goldman Sachs: Renesas beats Goldman Sachs’ third-quarter profit forecast. Why is its fourth-quarter margin falling?

Third-quarter results beat expectations. Why did the shares still fall?

Renesas reported third-quarter operating profit of 150.5 billion yen, above Goldman Sachs’ previous forecast of 147.7 billion yen; revenue was 435.2 billion yen, below the bank’s forecast of 440 billion yen.
On 29 October, the company’s shares fell 4.6%, while the TOPIX rose 0.3% over the same period. Goldman Sachs said the earnings presentation contained few statements capable of lifting investors’ expectations for the future; comments on pricing and shareholder returns also failed to materially raise market expectations.

Data center sales rose approximately 25% quarter on quarter in the third quarter, and the company guided for a further increase of approximately 15% in the fourth quarter; both memory interface and digital power management chips performed well.
Digital power accounts for about half of the data center-related business. The company expects its Saijo plant to begin contributing capacity in the first quarter of 2027, with annualized digital power capacity in 2027 reaching 2 to 2.5 times the previous year’s level.
Global automotive production is weak, but 28-nanometer microcontrollers and fourth-generation system-on-chips performed strongly. The company expects automotive application sales to continue growing at a low single-digit rate quarter on quarter in both the third and fourth quarters. Mass-market demand for industrial applications is also particularly strong, and the company expects its industrial business to remain strong.

The third-quarter margin improved more than expected, benefiting from contributions from non-automotive businesses such as industrial and data centers. However, margins vary across data center digital power projects, and the company expects a less favorable product mix in the fourth quarter.
Of the company’s expected quarter-on-quarter decline in the overall fourth-quarter margin, slightly more than half comes from a deteriorating product mix, with the remainder coming from exchange rates, higher production costs and year-end expenses. Cost pass-through is progressing gradually, but its impact on margins is limited.

Goldman Sachs considers the fourth-quarter margin decline a non-structural issue and expects sales and margins to improve again from the first quarter of 2027. The bank forecasts revenue of 1.9462 trillion yen and operating profit of 664.5 billion yen in 2027, up 16.6% and approximately 18.6%, respectively, from its forecasts for 2026.
Goldman Sachs made only minor adjustments to its earnings forecasts and maintained its buy rating and 12-month price target of 5500 yen. The company said proceeds from the sale of its timing devices business would be prioritized for growth investments, and it would reconsider shareholder returns after the fiscal year ends.