The Zhitong Finance App learned that the stock price of Japanese NAND flash memory manufacturer Kioxia continued to decline after announcing the second-quarter results. The reasons include factors such as the company's performance guidelines for the third quarter of fiscal year 2027 falling short of market expectations and not announcing additional stock repurchase plans. However, Goldman Sachs believes that from the fourth quarter of fiscal year 2027 to fiscal year 2028, Kioxia's profit growth prospects did not have any negative factors that could change the bank's views. Goldman Sachs pointed out that Kioxia management had previously promised to use 100% of the excess free cash flow (FCF) for shareholder returns. Based on this commitment, the bank believes that the company is likely to announce further shareholder return measures in the fourth quarter of fiscal year 2027 or fiscal year 2028, which will focus on share repurchases. Goldman Sachs reiterated its “buy” rating for the stock, as well as a 12-month target price of 39,000 yen.
Key Topic (1): Quarterly Profit Trends
Shipment volume. For the third quarter of fiscal year 2027, Kioxia's guidance was that shipments remained flat month-on-month. From the second quarter to the third quarter, Kioxia expects shipments in smart device applications to increase, while shipments in the SSD and storage applications will stabilize. However, the company expects that after entering the fourth quarter, the share of data centers and enterprise applications in shipments will increase significantly. According to the company, overall bit shipments from the third quarter to the fourth quarter are expected to increase by a single digit percentage month-on-month to about 10%. Among them, bit shipments in the smart device application sector are expected to decline.
price. In the third quarter of fiscal year 2027, Kioxia's comprehensive average selling price (ASP) guideline was a month-on-month increase in dollar terms from one digit to a medium single-digit percentage. Due to the increase in the share of low-cost products in the smart device sector, this increase may seem relatively moderate, but Kioxia expects that under the caliber of similar products, the price increase will be higher than the overall average. Meanwhile, the main customer, Apple (Apple), accounted for about 20% of the company's sales in the 2026 fiscal year. The company also recently stated at a performance briefing that memory prices will continue to rise. Therefore, Goldman Sachs believes that the moderate increase in ASP in the third quarter was only a temporary factor.
Key topic (2): The specific situation of long-term agreements (LTAs)
According to Kioxia, in 2027 and 2028, the share of bit shipments covered by multi-year long-term agreements was significantly over 50% (compared with three months ago, the proportion covered by the agreement has increased). Among them, the 2027 shipment volume has been fully distributed, including a one-year contract.
It's worth noting that even for multi-year long-term agreements, product prices are not locked at a fixed level. In contrast, while ensuring a certain minimum price, the actual shipping price still needs to be negotiated on a quarterly basis, and no specific price cap is set.
Key topic (3): Views on shareholder returns
Since the amount of money that can be used for dividends under the “Company Law” under Kioxia's individual caliber has been exhausted, the company did not announce an additional stock repurchase plan when announcing the second-quarter results. Normally, this allocable amount determined under the Companies Act is determined only once a year when the full year results are announced. However, the management plans to make a special settlement for Kioxia Operating Company on a half-year cycle, and then transfer the dividends to the holding company through a special settlement. It is expected that around January to March 2027, the amount that can be allocated will increase as the submission of audit reports is expected to be completed.
Regarding maintaining a cash reserve equivalent to about three months of sales mentioned at the performance briefing, Kioxia gave two explanations:
1. The definition of cash reserves uses total cash caliber rather than net cash caliber, which already includes funds required for future tax payments and growth investments such as capital expenses. This means that the company does not need to set aside additional cash for growth investments or necessary expenses in addition to a cash reserve equivalent to three months of sales.
2. This doesn't mean that the company will implement additional shareholder returns only after ensuring that it holds cash equivalent to three months of sales.
In terms of capital expenditure, the company's guidance for fiscal year 2027 is approximately 470 billion yen, which is slightly higher than the initial guideline of 450 billion yen. Although the company maintains an average annual capital expenditure forecast of about 470 billion yen for the three-year period 2027-2029, it also pointed out that the current investment progress is slightly ahead of the original plan.
Investment logic
Goldman Sachs gave Kioxia a “buy” rating. The company is the third-largest manufacturer of NAND flash memory in the world. Goldman Sachs believes that Kioxia's relatively high profit margin (due to strong cost competitiveness) and its steady progress in data center product development are all positive factors. Data centers are a segment of the NAND market that is expected to experience rapid growth.
The supply and demand relationship in the NAND market is tightening due to growing demand for enterprise-grade SSDs (eSSDs) for servers, tightening the supply of HDDs also used for storage applications, and concerns that the US may implement export controls on production equipment (related equipment is used in the fabs of major Korean memory manufacturers in China), driving NAND prices to continue to rise in 2027.
Although Goldman Sachs still believes that the structure of the NAND market itself has not changed (in other words, the market is still cyclical because there are still more participants in the NAND market compared to the HDD and DRAM market dominated by two to three large companies), the bank believes that compared to the previous cycle, higher profit levels are expected to be maintained, and the market will gradually realize that profit levels for the next two to three years will not only be higher than market expectations, but also sustainable.
This view is based on the following three points: AI demand is still strong, and supply growth is limited in the short term, so the tight supply and demand situation is likely to continue until 2028; major memory manufacturers will continue to prioritize investment in DRAM; and DRAM (for enterprise-grade SSDs) procurement channels have already been set up.
According to Goldman Sachs's forecast, the expected price-earnings ratio (P/E) for the 2028 fiscal year corresponding to Kioxia's current stock price is about 2.5 times, which indicates that market sentiment is still largely skeptical about the sustainability of the current high level of profit. However, Goldman Sachs stressed that after the recent stock price correction, the company's shareholder return rate has risen to slightly less than 20% according to the bank's combined forecast for the 2028 fiscal year dividend and stock repurchase, and the risk-return characteristics are very attractive.