UBS Initiates Coverage on Flash Memory Giant Kioxia, Assigns 'Buy' Rating

UBS initiates coverage on Japan’s flash memory giant Kioxia Holdings with a "Buy" rating, setting a target price of 79,000 yen, which offers significant upside from its current stock price of 61,280 yen.

The firm forecasts Kioxia's operating profit for the fiscal years of 2027 and 2028 to be 7.11 trillion and 8.99 trillion yen, respectively, far exceeding market consensus.

UBS points out that AI inference is driving a structural transformation in the NAND industry, and Kioxia's horizontal scaling technology can effectively cap the rise in wafer costs, a positive factor that is not yet fully priced in by the market. Analysts anticipate NAND prices to increase on a sequential basis for six quarters.

Profit Forecasts Significantly Exceed Market Consensus

UBS is particularly optimistic about Kioxia's performance in fiscal 2028. The market expects Kioxia's operating profit for that fiscal year to be 7.47 trillion yen, while UBS' forecast is nearly 20% higher than the consensus, showing a significant divergence. Analysts believe the market has underestimated the trend in flash memory prices. UBS projects a sequential increase in NAND flash memory prices for six consecutive quarters, with the entire upcycle lasting until the third quarter of 2027.

Furthermore, UBS estimates that Kioxia's future growth in bit shipments will closely follow the industry's overall growth rate of about 20%, and its unique profit elasticity is being underestimated by the market.

AI Inference Drives Structural Growth in Storage Demand

UBS posits that AI inference is becoming a long-term driver of NAND demand. In inference applications, due to the need to retain users' chat records, NAND is beginning to play a role in computing systems similar to DRAM.

Despite the existence of cache compression technologies such as TurboQuant, the storage demand triggered by AI continues to grow rapidly. Analysts believe that AI inference imposes a rigid demand for the performance and capacity of devices like solid-state drives. At the same time, the world's major manufacturers are prioritizing their capital expenditure towards DRAM and HBM. This has led to a lag in NAND capacity expansion, with a supply shortage across the industry that may continue until 2027.

Unique Horizontal Scaling Establishes Cost Advantage

Kioxia has established a competitive advantage in bit cost. Compared to South Korean rivals focused on vertical stacking, Kioxia prioritizes expanding bit density through horizontal scaling technology, capping the rise in wafer costs.

UBS estimates Kioxia's per wafer cost at around $2,000, significantly lower than Samsung's $4,000 and the $6,000 of Micron and SK Hynix. The extremely low cost allows Kioxia to maintain industry-leading profit margins.

Kioxia began using CBA (wafer direct bonding) technology from the BiCS8 era, manufacturing and bonding CMOS separately from the array. The analysis suggests that this differentiated strategy ensures its high yield and low cost.

Sound Valuation Basis Supports Long-Term Potential

UBS sets Kioxia's target price at 79,000 yen, based on the forecast of the company's net asset value per share at the end of fiscal 2028 and applying a 4.7 times price-to-book ratio multiplier. This multiplier is based on Kioxia's expected average return on equity of 41% during the fiscal years 2028 to 2031, and an equity cost of 8.6%. This method has been consistently applied to Asian memory companies.

Furthermore, the target price corresponds to an approximately 4 times EV/EBITDA multiple. The analysis points out that this is in line with the historical average level of the global memory industry over the past decade and the valuation since the company's listing.