Nikon, the legendary camera maker, has faced challenges in recent years. The rise of smartphones has significantly impacted the compact camera market, affecting even Nikon's traditional strength in professional and enthusiast cameras. However, a strategic shift towards their "Components Business" segment, particularly in the extreme ultraviolet (EUV) lithography market, might be their key to reclaiming their former glory.

This newly disclosed segment, found within "Industrial Metrology and Others," is projected to yield a remarkable JPY 8 billion operating profit on a revenue of JPY 35 billion. This translates to an impressive operating margin of nearly 23%, a figure that would attract any tech investor. What's even more noteworthy is that this is just the first year of revenue generation for this burgeoning business.

What is EUV Lithography and Why Does it Matter?

EUV lithography is the groundbreaking technology that enables the manufacturing of smaller, faster, and more powerful microchips. It's a market dominated by ASML, a Dutch company that virtually monopolizes EUV lithography machines. However, ASML depends on a network of suppliers for crucial components, creating an opportunity for Nikon.

Nikon, despite exiting the semiconductor lithography market years ago, strategically retained and nurtured their expertise in advanced optics. They are now leveraging this expertise to supply specialized optical components to companies like ASML, capitalizing on the surge in global semiconductor demand.

This move is strategic brilliance. By focusing on a niche area where their expertise is unmatched, Nikon is effectively bypassing the fierce competition in lithography machines, where ASML reigns supreme. They're silently becoming an essential part of the global semiconductor industry, reaping significant profits.

Nikon's Components Business vs. Imaging Products

To highlight the potential of Nikon's Components Business, let's compare its projected operating margin to that of their struggling Imaging Products business:

The stark contrast in profitability raises a crucial question: Could Nikon's future be defined more by supplying the technology that is making cameras increasingly irrelevant than by cameras themselves?

The Future of Nikon

The earnings call transcript reveals Nikon's ambition to "develop key components which [they] can expect to get a high market share" in the EUV space. This signifies their intent to become a dominant force in this critical niche, not merely a supplier.

Furthermore, the potential for growth is immense. The semiconductor industry is booming, driven by the ever-increasing demand for microchips in various sectors, ranging from smartphones to cars to artificial intelligence. As chip manufacturing becomes progressively complex and demanding, the need for sophisticated optical components will only escalate. Nikon, with its deep-rooted expertise and strategic positioning, is well-prepared to ride this wave.

While the world remains focused on their camera business, Nikon is quietly constructing a powerhouse in a hidden gem of a market. This could be the dawn of a remarkable turnaround, showcasing Nikon's ingenuity and adaptability.

"Hypothesis: Nikon's Components Business will become their primary source of profitability within the next three years, surpassing the Imaging Products business. Supporting Numbers: Components Business operating margin: 23% (projected) Imaging Products Business operating margin: 3% (projected) Global semiconductor market growth: Projected CAGR of 8.6% from 2021 to 2028 (Source: Grand View Research) EUV lithography market growth: Projected CAGR of 34% from 2021 to 2027 (Source: Allied Market Research)"

"Fun Fact: Nikon's roots lie in military optics, supplying binoculars, periscopes, and rangefinders to the Japanese Navy during World War II. This extensive history in precision optics is now driving their success in the advanced EUV lithography market."