Tokyo Electron (8035) competitive advantage analysis | Coating/developing equipment with a 90% global share and tailwinds from AI semiconductor investment

[Summary]

When it comes to AI semiconductor investment themes, it's easy to look at NVIDIA, TSMC, and memory giants.

However, in the field where semiconductors are mass-produced, manufacturing equipment manufacturers have considerable control. Tokyo Electron (8035) is a typical example.

The company has equipment in multiple areas of semiconductor front-end processing, including coater/developer, etching, film formation, and cleaning. Among them, the official blog explains that it has a 90% global market share for coaters/developers, and nearly 100% market share for EUV lithography, including High NA.

This is a number that investors often respond to.

However, simply viewing it as ``strong because it is a monopoly'' is a bit rough. TEL's true strength lies in the fact that its equipment is integrated into the customer's mass production process, creating a situation where it is difficult to change everything, including yields, recipes, maintenance, and improvements.

In the fiscal year ending March 2026, sales will be 2,443.5 billion yen and operating income will be 624.9 billion yen. Operating profit margin was 25.6% and ROE was high at 29.6%. On the other hand, operating income decreased by 10.4% year-on-year, and at a time when stock prices are taking into account the AI ​​semiconductor theme first, we can see that orders and next-generation investment are highly sustainable.

Rather than being an "AI stock," Tokyo Electron is an infrastructure company that supports semiconductor manufacturing processes in the AI ​​era. Although it is a strong company, calmness is required due to the silicon cycle, regulations for China, and valuations that are based on expectations.

First, the conclusion

It is easier to understand Tokyo Electron's competitive advantage by dividing it into five parts.

When looking at semiconductor equipment stocks, it is easy to misunderstand if you only look at sales growth rates.

What is important is which process is in control, how difficult that process is for customers to replace, and whether profits continue even after the equipment is delivered.

TEL is strong in these three points. That is why it is talked about alongside ASML, Applied Materials, and Lam Research among the world's large semiconductor equipment manufacturers.

However, it is a little different from a single super bottleneck company like ASML's exposure equipment. TEL is a multi-product company that is involved in multiple processes, including before and after exposure.

1. What does TEL sell?

Tokyo Electron covers a wide range of front-end processes among semiconductor manufacturing equipment.

Typical devices are as follows.

The official product page also explains that TEL is a company that has equipment for four consecutive patterning processes. This is big.

With the miniaturization of semiconductors, it is not enough to improve the performance of exposure equipment alone. If coating, development, film formation, etching, and cleaning are not coordinated, yields will not increase.

From the customer's perspective, the equipment is more than just a machine. It's mass-produced quality.

That's why equipment manufacturers are strong once they get into the process. Process recipes, equipment data, maintenance history, and improvement know-how accumulate, making it easier for the same manufacturer to be called upon for the next generation line.

2. Contents of 90% global share

Tokyo Electron's iconic product is the coater/developer.

A coater/developer is a device that uniformly coats a wafer with photoresist during the lithography process and develops it after exposure. When ASML's exposure equipment uses light to print patterns, TEL's equipment is responsible for the "painting" and "developing" parts before and after that.

The company's official blog explains that its global market share for coater/developer equipment is 90%, and for EUV lithography it is nearly 100%, including high NA.

This number is strong. Quite strong.

However, as an article, it is better not to just write "exclusive" and end the article. The outlook changes depending on the market definition and generation, and the competition in semiconductor devices can always be rewritten by next-generation processes.

Still, a 90% share among coaters/developers is not just a high market share. This is a position close to that of "standard equipment", which is deeply involved in mass production conditions for cutting-edge logic, DRAM, NAND, and High NA EUV.

3. Why is the market share difficult to collapse?

The strength of TEL cannot be explained only by the specifications in the product catalog.

Semiconductor manufacturers work together with equipment manufacturers to finalize processes several years before mass production lines begin. New materials, new film thicknesses, new patterns, defect control, throughput, chemical usage, equipment availability. Everything is connected.

Once adopted, the equipment is deeply integrated into factory operations.

Customers don't simply switch to another manufacturer just because it's cheaper. If the yield decreases due to switching, the loss will be more than just the difference in equipment price.

This is what's interesting about the semiconductor equipment business. A high market share is secured not only by sales power but also by how deep a company is in customer factories.

4. Current location based on financial results for the fiscal year ending March 2026

Tokyo Electron's financial results for the fiscal year ending March 2026 showed both strengths and cautions.

Operating profit margin was 25.6%. As an equipment manufacturer, profitability is quite high.

Financially strong as well. Looking at the figures of an equity ratio of 71.5% and operating cash flow of 539.7 billion yen, the company has the strength to proceed with research and development, capital investment, and shareholder returns at the same time.

However, operating income decreased.

If you ignore this and write that ``AI semiconductors are all tailwinds,'' the article will be lighter. The market is already looking at semiconductor equipment stocks as an AI theme. It's pretty well priced in that it's a good company, so from here you can look at the quality of orders, mix, profit margins, and next-year outlook.

The numbers are strong. The problem is that expectations are also strong.

5. Growth scenario after 2027

TEL's medium- to long-term growth will not be determined solely by AI demand.

Rather, the biggest problem is that the semiconductor manufacturing process itself is becoming more complex.

HBM and memory investment

HBM has become essential for GPUs for AI servers.

HBM is not just about increasing memory capacity. The difficulty of manufacturing processes such as lamination, connection, yield, inspection, and cleaning will increase. If memory manufacturers continue to invest in capital, it is likely that there will be demand for TEL film formation, etching, cleaning, and peripheral processes.

3D and increased number of processes

It has become difficult to live in an era where performance can only be improved through miniaturization.

Semiconductors are moving toward 3D structures and heterogeneous integration, such as 3D NAND, GAA, advanced packages, and chiplets. The more complex the structure, the more steps are required to create the membrane, scrape it, wash it, and measure it.

As the number of processes increases, equipment manufacturers have a tailwind.

Factory distribution

Diversified investment in semiconductor factories is progressing in the United States, Japan, Europe, India, and other countries.

Although this is a response to geopolitical risks, it also represents a business opportunity for equipment manufacturers to establish new lines. This is because, in addition to expanding existing factories, it is necessary to build mass production lines with the same quality in new regions.

However, building a factory takes time from announcement to mass production. The timing of receiving orders, shipping, acceptance inspection, and recording sales is delayed. Stock prices move first, and business results come later. Please be aware of this time difference.

Illustration: Until AI demand reaches TEL

Biggest risk

The stronger the company, the better to clearly write down the risks.

Sales and export regulations for China

China is a large semiconductor equipment market.

If the US-China conflict intensifies and export restrictions on advanced equipment and related technologies expand, TEL's sales growth will be affected. Particularly in a situation where demand from China is supporting the market, it is easy to sell equipment stocks as a whole on regulatory news alone.

Silicon Cycle

Semiconductor equipment is subject to customers' capital investment cycles.

Even if AI-related investment is strong, orders will slow down if memory and logic investment becomes temporarily excessive. Equipment stocks tend to be bought earlier when good news continues, and they adjust quickly when there are signs of a slowdown.

Expected leading valuation

TEL is a high-quality company, and the market knows that it is high-quality.

In other words, when making investment decisions, it is not enough to simply ask "Is the company a good company?" You need to look at how much future profits are factored into the current stock price.

Even if a company is good, its stock price may not grow if expectations are too high. This is a common story among semiconductor equipment stocks.

Comprehensive judgment

Tokyo Electron is in a very strong position as a semiconductor infrastructure company in the AI era.

We have a 90% global market share as a coater/developer, and a dominant position of nearly 100% in EUV/High NA EUV. Furthermore, we are involved in the customer's process, including film formation, etching, and cleaning.

The company's competitive advantage lies not only in the performance of its equipment, but also in its long-lasting relationships with customers, including joint development, deep integration into mass production processes, and maintenance and improvements.

Personally, rather than viewing TEL as a peripheral stock of AI semiconductors, it makes more sense to view TEL as a process infrastructure for mass-producing cutting-edge semiconductors.

However, stock prices do not continue to move based on stories alone.

From 2027 onwards, while the tailwinds of HBM, 3Dization, and factory dispersion will continue, there will also be times when Chinese regulations, the silicon cycle, and high expectations become a burden.

The stronger the stock, the faster good materials will be factored in. When looking at TEL, you want to check not only the high market share, but also orders, profit margin, cash, and how far ahead of the market the company is.

Source/Reference materials

• Tokyo Electron “Coater/Developer LITHIUS™ Series”
• Tokyo Electron "[Products/Services (Search from all products)]" (https://www.tel.co.jp/product/all/index.html)
• Tokyo Electron Blog "CLEAN TRACK™ LITHIUS Pro DICE™ World-class Productivity and Innovative Defect Control Technology"
• Tokyo Electron "Summary of Financial Results for the Year Ending March 2026 [Japanese Standards] (Consolidated)", Disclosure date: 2026-04-30
• Tokyo Electron “Financial Forecast”