Kioxia's Financial Results and the Debate on Stock Market Valuation

Kioxia’s current stock price reflects a rather harsh assessment regarding the sustainability of its recent high profitability. However, it cannot be said that the market is wrong simply because the stock is cheap, nor that the market has correctly foreseen a future decline in earnings simply because the stock price is falling. What is important is to consider what level of profit decline, starting when, and lasting for how long would be required to justify the current stock price. This is, in fact, an important theme that accompanies stock investment.

Kioxia’s financial results for the July-September quarter, announced on October 30, showed a high level of operating profit at approximately 199.47 billion yen and net profit at approximately 135.57 billion yen. Meanwhile, the operating profit forecast for the October-December quarter is approximately 199.5 billion yen, which is almost flat from the previous quarter. While current profits have not collapsed, they did not reach the further profit growth the market had expected. The company’s forecast fell about 15% short of the operating profit consensus prior to the announcement.

The stock price was 13,470 yen at the Tokyo Stock Exchange close on October 30, but it fell to 11,805.5 yen in the after-hours PTS trading following the earnings announcement.
If the July-September quarter earnings per share of 838.31 yen are multiplied by four, the annualized EPS is approximately 3,353 yen. The P/E ratio based on the Tokyo Stock Exchange closing price is about 4 times, and about 3.5 times based on the PTS price. Of course, this is not a P/E ratio based on the company’s full-year forecast, but a multiple assuming that the most recent quarter’s profit continues for one year; even so, it is a low valuation.

So, what is the market wary of? The most natural interpretation is that it does not accept the current high profits as the standard profit for the future. The profits of memory companies fluctuate significantly depending not only on sales volume but also on prices, supply capacity, and manufacturing costs. Even if demand for AI expands, there is a possibility that profits will decrease due to increased supply or falling prices. The growth of demand and the sustainability of current high profits must be considered separately.