KLA Is Well-Positioned to Manage a Potential Slowdown in WFE in 2023; Raising FVE to $410 Per Share

KLA reported fiscal fourth-quarter sales at the high end of management’s guidance, led by continued strength in the foundry and logic segments. Although the firm is dealing with supply chain constraints, management maintains its view that KLA will grow revenue by at least 20% in calendar 2022. Based on ongoing supply chain headwinds, we expect some wafer fab equipment spending that was slated for this year to be pushed into 2023, which should help smooth out the WFE trajectory. While we expect memory WFE spending to decline next year, we think KLA can still grow in 2023 as the firm is highly levered to the strategic R&D investments by customers for leading-edge process technologies across all chip types. We view this type of WFE spending as relatively more recession proof relative to capacity expansions that have a larger impact on the likes of Applied Materials or Lam Research. We are raising our fair value estimate for wide-moat KLA to $410, as we incorporate the stronger results and near-term outlook. Shares look modestly undervalued at current levels.