Japan’s Advantest is solidifying its lead in global sales of chip testing equipment, and its share price is hitched to that of chipmaker Nvidia as both ride the growth of generative artificial intelligence.
Advantest and US-based rival Teradyne hold a combined 80% global market share. They long stood neck and neck, but the Japanese player gained the upper hand around 2022, when generative AI began to attract attention.
Advantest widened its share to about 50% in 2023 compared with Teradyne’s roughly 30%.
“Demand for AI chips will continue to increase,” Group CEO Douglas Lefever said in his new year’s message for 2025. “As semiconductors continue to become more complex, Advantest’s core competence of semiconductor [testing] will only become more important.”
Advantest’s growth has been driven by test tools for system-on-a-chip (SoC) integrated circuits, which combine functions like processing and memory onto a single chip.
The company raised its sales forecast for SoC test equipment for the year ending March 2025 by JPY 32 billion (USD 202 million) in October, now projecting a 32% increase to JPY 324 billion, or USD 2.1 billion. That would account for more than half of its forecast JPY 640 billion (USD 4.1 billion) in consolidated sales.
As semiconductor technology evolves, the cost and difficulty of manufacturing increase. Chipmakers need to find defective products early in the design and mass production stages. For cutting-edge products in particular, more tests are conducted at various points in the process to improve yields.
Advanced AI chips involve cutting-edge manufacturing techniques like “chiplets”—tiny integrated circuts with specific functions that are combined into packages—and 3D packaging that stacks multiple chips.
“Advanced packaging calls for higher yields,” Nomura Securities analyst Atsushi Yoshioka said.
Advantest test tools are in demand for a wide range of applications, from chip development to mass production.
To meet the needs of cutting-edge chip testing, Advantest spends heavily on research and development. Its R&D expenses for the year ended March 2024 reached JPY 65.5 billion yen (USD 424.5 million), equivalent to 13% of sales.
Teradyne’s figure was 12% in 2023. Top Japanese chip equipment maker Tokyo Electron spent 11% in the year to March 2024, while smaller Lasertec devoted 6% in the year ended June 2024.
Though R&D expenses are high, returns are growing. Advantest’s R&D efficiency—total operating profit for the five years through March 2024 divided by R&D expenses for the previous five years—is 3.02, up from 1.19 five years ago.
Teradyne’s R&D efficiency, calculated from QUICK FactSet data, grew from 1.75 in 2019 to 2.72 in 2023.
Incorporating outside technologies through acquisitions has helped improve R&D efficiency. Advantest gained its V93000 series flagship SoC test equipment by acquiring U.S.-based Verigy for about USD 1.1 billion in 2011.
“We have access to a wide range of customers, from large-scale foundries and OSAT (outsourced semiconductor assembly and test) providers to startups,” Advantest president Koichi Tsukui said.
The company expects consolidated net profit to grow 96% to JPY 122 billion (USD 790.7 million) for the year ending March 2025. The QUICK Consensus average of market forecasts projects net profit at JPY 139.3 billion (USD 902.9 million) for that year and JPY 189.3 billion (USD 1.2 billion) for the year ending March 2026.
Advantest’s stock price soared 92% in 2024. Though not as large as Nvidia’s 180% jump, the company performed better than Teradyne, which rose 16%. Tokyo Electron fell 4%, and Lasertec dropped 59%.
Shares are trading at more than 60 times forward earnings. But based on the market forecast of earnings per share for the year ending March 2026, shares look less pricy, at around 39 times.
Advantest shares have been rising in tandem with Nvidia’s. The correlation coefficient between Advantest and Nvidia over the past three years was 0.93, compared to Teradyne’s 0.62 and Tokyo Electron’s 0.72.
“It is difficult to imagine a sudden drop in demand or a significant oversupply,” said Shoichiro Kamisaki, an analyst at Tokai Tokyo Intelligence Laboratory. “This is a stock that will benefit the most from growth in generative AI chips.”
Risk factors include the US tightening chip-related export restrictions on China, but “its relative exposure to the Chinese market, where a variety of risks are expected, is low,” Nomura’s Yoshioka said.
This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.