Japanese Toilet Maker Toto's HUGE AI Windfall

0:00Welcome to the podcast. I'm your host, Jaden Schaefer. Today on the show, I want to talk about I think a really interesting story that basically nobody is covering and that is how there's a toilet company Toto out of Japan and it is quietly becoming one of the most undervalued and overlooked AI memory companies or beneficiaries out there. This is really interesting we see AI basically coming into every industry and manufacturing for AI and AI parts we need a lot of help on that front and some of it is coming from the most unlikely of sources like this Japanese toilet company. So I I want to break down the story and show you what's going on with Toto, why their stock has rallied 40 % on some of this news.

0:42Before I get into all of that, I wanted to mention, if you want to try all of the AI models I talk about on the show, and if you're not a developer and you'd like to build AI tools really quickly, we have a new Vibe Builder design over on my startup, AIbox.ai, where you describe any tool or workflow you'd like to create, and it builds it for you. In addition, you get access to over 40 of the top AI models all in one place for$8.99 a month. OpenAI, 11 Labs, Google Gemini, Grok, tons of image and audio generators. Go check it out. It's all on AIbox.ai for$8.99 a month. All right. I want to talk about what's going on in Japan right now.

1:20This is, you know, Toto is famously a company. They have like these toilets with like heated seats and this like the sprayer that sprays you and washes you and dries you. and like you know there's like all this crazy everyone's heard the the legendary fables of japanese toilets and toto also is a brand that is in america you've seen in lots of airports as well as far as just a toilet company now in order to make these toilets they obviously have to do a lot of work in manufacturing in ceramic and there's a new report that just came out of the financial times that says a uk activist investor pallister capital has taken a stake in this company, they sent a letter to the board and they argued that Toto's advanced ceramic division is dramatically undervalued.

2:01They said that the company, which of course is just known for toilets, is basically right now sitting in the middle of AI infrastructure and semiconductors supply chain story and that it should be playing a bigger role. Palastir goes so far as to call Toto, quote, the most undervalued and overlooked AI memory beneficiary. I think that is definitely activist framing. This is not kind of a neutral analysis, but it's rooted in something really real, right? There is a surge in AI spending right now, and it has tightened memory markets, and it's really intensified demand for semiconductor manufacturing tools.

2:33And Toto is, I guess, apparently in this whole ecosystem. So for decades, Toto has been producing highly specialized ceramic components, which are used in chip fabrication. These aren't, you know, in bathrooms, of course, but they're precision engineered parts, and they hold silicone wafers in place during delicate processes like etching and deposition. And so they have to be able to go up to really extreme heats. They have to do a lot of thermal stress and they have to also prevent contamination. They're also supposed to maintain like exact tolerances. And Toto's lineup includes, you know, like air bearings, they do bonding capillaries and a lot of other things.

3:09I think there's some structural components for high precision semiconductor equipment that they work on. And right now investors are starting to actually realize this. Of course, we have this activist investor that's going off on it. But I think this isn't just like a side project for Toto. There's some recent reporting that suggests that advanced ceramic business for Toto accounts for about 40 % of their operating profit. And I think even as the brand, right, if this is known globally with toilets, that's what everyone would associate Toto with. But their AI data centers are starting to, like the AI data centers that they're supplying are starting to have a massive outsized demand for memory.

3:44There's a tightening supply chain, which is pushing up wafer fab utilization. And I think because of that dynamic, this is feeding directly into demand for the equipment and components that are required to manufacture those chips. So Toto's been already like working on this. They've already been kind of making those chips. It was sort of a side thing. And all of a sudden, this is becoming a major part of their business. I mean, 40 % of their operating profit and nobody's talking about it until, of course, this activist investor takes a big stake, starts, you know, very vocally discussing this.

4:11And now, of course, their stock price has been going up. So Palastir is basically urging management of the company, like, look, guys, you have to communicate the value of the segment better, you need to sharpen capital allocation, and you have to deploy your approximately they have about 76 billion in net cash, or when that's in Japanese one, of course, but he's saying, look, you guys have to deploy this more aggressively, potentially expand the ceramics capability ahead of rivals. And I think there's a bunch of different analysts at firms, Goldman Sachs is one of them, and they've highlighted that earnings leverage tied to those specific components in part, you know, on expectations of a NAND recovery, you know, this is super critical.

4:50And the market obviously has responded. Toto shares are up about 40 % year to date. I think this is a lot of this is rising because of the analyst upgrades and of course the activist pressure. Investors, I think, are not just trying to chase you know kind of like a novelty ai narrative which is attached to a toilet brand i think this is probably what a lot of people would accuse them of or would say like look you guys are just trying to like you found one little in in the ai industry and because it's booming you're a toilet company you're trying to just kind of bump your stock up it reminds me of you know during a lot of the crypto days there's like a lemonade company that just changed its name to blockchain lemon or something like that so that it could uh you know then i don't i have no idea why they literally just put the name blockchain in their company name and all of a sudden their stock bumped up it was about to get delisted for lack of like trading shares and stuff and that saved them for a couple months and then i think eventually they they got pulled off of the um off the stock market for lack of volume or something like that but anyways it doesn't feel like a desperate ploy like that i mean this is 40 of their operating revenue and this is a you know they have a massive opportunity here so i think there's legitimately an opportunity toto may turn into an AI ceramics supplier for these wafers and all of that.

6:02I think there's some people that are trying to be cautious with this, specifically because when Pallister, the kind of activist in all of this, he was he's putting a pitch in for the company and he was saying like, look, you guys have a this is like his quote is that there was a durable five year technological moat. Some are saying this isn't quite accurate. Now, what I will say is that electrostatic chucks and also a lot of the other kind of related ceramic parts those are super essential for advanced etch processes and so I think whether that translates into kind of this growth this like sustained growth and this kind of breakout is going to depend a lot on the fab expansion plans major memory manufacturers have been really careful about committing to large capacity increases they're kind of worried about oversupply if there was a bubble or if things shifted if AI high demand cools.

6:47One thing I will say though, is that Toto moving from kind of being this famous toilet brand to perhaps a semiconductor material supplier is just showing how much in kind of the overall industry, how much of a shift we're seeing and how AI is definitely changing supply chains. I think the people that are winning is not just NVIDIA or AMD. They include a lot of, you know, material sciences firms, a lot of niche component makers. There's a lot of kind of this embedded deep tech that's inside of chip production that is seeing just huge booms and is, you know, being incredibly successful and prospering a lot.

7:22I mean, even to the point where like I have a neighbor where I live in North Carolina, who works for an organization who's absolutely exploding right now. They've just famously done gas tanks for industrial, you know, buildings. So if you have like a backup generator, you have an industrial gas tank that can power that for power outages and things like that. And their business is exploding right now because all these new data centers need industrial gas tanks for if you know power ever goes out and and they need like a backup power supply so there's all of these kind of like run-on industries and businesses that are benefiting from the ai boom that i think we don't talk about enough right now i think all over japan there's a lot of other legacy manufacturers i think there's ajinomoto who is doing chip substrate materials there's like cosmetic companies that are supplying wafer cleaning agents.

8:08I think there's companies that are being assessed through all of these different, you know, like basically all these companies that did something different. And now that's like, well, we need a lot of new supplies for what's happening in AI. And they're looking outside of maybe the typical AI data center chip providers. And they're going to, you know, they're going to some of these like cosmetic companies and other places, toilet companies, places you wouldn't expect. I think there's a lot of opportunity right now. But I think this is also probably a little bit of a cyclical risk that comes with really wrapping all of your business into the next wave of tech capital spending, because this is obviously going to go crazy, and a lot of money is going to go in this way.

8:46But Toto, potentially, you know, if there was an AI bubble today, and all of the all, you know, everything got wiped out, I mean, 40 % of the operating profits of Toto are coming from coming from this right now, making these making these ceramic bits. So I think at the end of the day, these companies don't want to tie themselves too heavily, but also there's massive spending, massive demand, and I think they can all make a lot of money by making sure they get into the industry. So it's a really fascinating time to watch as toilet companies are becoming a really important part in the semiconductor supply chain.

9:19Thank you so much for tuning into the podcast today. If you enjoyed the episode, it would really help the show a ton, an enormous amount if you could leave a rating or review. Basically, it just helps the show get shown to more amazing people like yourself, and it helps grow it in the algorithm. So if you could leave a rating and review, it would really help out a ton. Thanks so much for tuning in. I'll catch you in the next episode.