Company Reports

We raise our fair value estimate for shares of wide-moat KLA to $530 from $510 after the firm’s March-quarter results came in above our expectations. Guidance for the June quarter is in line with our forecasts and also tracks well with our longer-term recovery expectations for semiconductor equipment spending. We continue to expect KLA to grow in line with the wafer front-end equipment market in calendar 2024 following a cyclical downturn resulting in revenue decline over calendar 2023. Even with our fair value increase supported by increased confidence in a multiyear recovery, we continue to view the stock as overvalued.

KLA is one of the largest providers in the world of wafer fabrication equipment for semiconductors, specializing in process control, where we expect its unmatched breadth and depth to defend and increase its market share. We believe trends toward higher complexity in chips will drive increasing demand and strong pricing for KLA’s equipment, including artificial intelligence and new technologies like high-bandwidth memory. We particularly like that KLA boasts the highest profit margins out of any WFE firm under our coverage.

We maintain our $510 fair value estimate for shares of wide-moat KLA after the firm’s December-quarter results aligned with our longer-term recovery expectations for semiconductor equipment spending. KLA’s results were right in line with our estimates for the quarter. The firm’s March-quarter guidance missed our model, but this resulted from a large deal pushing out into the June quarter and we don’t see it reflecting fundamental weakness. Overall, we expect KLA to grow in line with the wafer front-end equipment market in calendar 2024 after a downturn that shrank revenue in calendar 2023. Despite the near-term weaker guidance sending shares down 6% after hours, we see shares as overvalued. We believe improved results in 2024 and 2025 are already baked into the stock, and our expectations for the firm’s fundamentals going forward don’t support the current price.

KLA is one of the largest providers in the world of wafer fabrication equipment for semiconductors, specializing in process control, where we expect its unmatched breadth and depth to defend and increase its market share. We believe trends toward higher complexity in chips will drive increasing demand and strong pricing for KLA’s equipment, including artificial intelligence and new technologies like high-bandwidth memory. We particularly like that KLA boasts the highest profit margins out of any WFE firm under our coverage.

We raise our fair value estimate for wide-moat KLA to $510 per share, from $410, following the firm’s fiscal first-quarter results. Our fair value estimate raise comes largely due to upward revisions to our long-term growth expectations for both the wafer fabrication equipment market and KLA. We viewed KLA’s fiscal first-quarter results positively against a challenging market environment. WFE demand has been soft throughout 2023 behind weaker end-consumer demand and severe inventory digestion at memory chipmakers. While KLA is vulnerable to these market cycles, we see long-term growth drivers for the firm and are expecting results to recover in calendar 2024 and into 2025. We see shares as undervalued.

KLA is one of the largest providers in the world of wafer fabrication equipment for semiconductors, specializing in process control, where we expect its unmatched breadth and depth to defend and increase its market share. We believe trends toward higher complexity in chips will drive increasing demand and strong pricing for KLA’s equipment, including artificial intelligence and new technologies like high-bandwidth memory. We particularly like that KLA boasts the highest profit margins out of any WFE firm under our coverage.

KLA dominates the process diagnostic and control, or PDC, segment of the semiconductor equipment industry. During the fabrication process, wafers must be inspected for defects and proper critical dimensions to identify and rectify problem sources. As chipmaking customers continue pursuing Moore's law, smaller chips must meet more precise specifications, which in turn increase the need for advanced PDC tools from the likes of KLA. These tools help customers improve yields, accelerate development and product ramps, and ultimately maximize profitability. We think KLA boasts a wide economic moat and is well positioned for healthy growth going forward.

We maintain our $410 per share fair value estimate for wide-moat KLA after it reported strong fiscal fourth-quarter results and good fiscal first-quarter guidance that fit our model. Front-end wafer fabrication equipment, or WFE, is in the midst of a downturn in calendar 2023, with both memory and logic chipmakers reducing spending with lower end demand. However, KLA’s services revenue grew nicely in the quarter, showing continued use by customers despite lower capital expenditure, which mirrored good results from peer Lam Research last night. With a dominant position in the process diagnostic and control market that results in a wide moat rating, we’re confident KLA will capture demand when the WFE market rebounds. We find valuation challenging at the moment, and would recommend investors wait for a pullback before buying in.

KLA dominates the process diagnostic and control, or PDC, segment of the semiconductor equipment industry. During the fabrication process, wafers must be inspected for defects and proper critical dimensions to identify and rectify problem sources. As chipmaking customers continue pursuing Moore's law, smaller chips must meet more precise specifications, which in turn increase the need for advanced PDC tools from the likes of KLA. These tools help customers improve yields, accelerate development and product ramps, and ultimately maximize profitability. We think KLA boasts a wide economic moat and is well positioned for healthy growth going forward.

KLA dominates the process diagnostic and control, or PDC, segment of the semiconductor equipment industry. During the fabrication process, wafers must be inspected for defects and proper critical dimensions to identify and rectify problem sources. As chipmaking customers continue pursuing Moore's law, smaller chips must meet more precise specifications, which in turn increase the need for advanced PDC tools from the likes of KLA. These tools help customers improve yields, accelerate development and product ramps, and ultimately maximize profitability. We think KLA boasts a wide economic moat and is well positioned for healthy growth going forward.

KLA dominates the process diagnostic and control, or PDC, segment of the semiconductor equipment industry. During the fabrication process, wafers must be inspected for defects and proper critical dimensions to identify and rectify problem sources. As chipmaking customers continue pursuing Moore's law, smaller chips must meet more precise specifications, which in turn increase the need for advanced PDC tools from the likes of KLA. These tools help customers improve yields, accelerate development and product ramps, and ultimately maximize profitability. We think KLA boasts a wide economic moat and is well positioned for healthy growth going forward.

KLA reported fiscal third-quarter sales at the high end of management’s guidance range. While KLA is not immune to the weaker demand environment for wafer fab equipment, we expect the wide-moat process control leader to outperform the overall WFE market in 2023, thanks to its greater exposure to leading-edge logic and foundry customers such as TSMC, Samsung, and Intel, who will continue to ramp new process technologies despite macroeconomic headwinds. We are maintaining our fair value estimate of $410 per share and we see shares as modestly undervalued.

KLA reported fiscal second-quarter sales slightly above management’s guidance, led by continued strength in the foundry and logic segments. Although the firm is not immune to the weaker demand environment for wafer fab equipment, we expect wide-moat KLA to outperform the overall WFE market in 2023 thanks to the firm’s greater exposure to leading-edge logic and foundry customers such as TSMC, Samsung, and Intel that will continue to ramp new process technologies despite macroeconomic headwinds. We are maintaining our fair value estimate of $410 per share and we see shares as fairly valued.

KLA reported fiscal 2023 first-quarter sales at the high end of management’s guidance, led by continued strength in the foundry and logic segments. Concerning the latest U.S. restrictions on exports to China, management said a meaningful amount of KLA’s business in China is in mature process technologies that are not the focus of the restrictions, though some systems and services will still be affected. The firm sees $100 million in lost sales to China in the December quarter and about $600 million-$900 million in calendar 2023, which represents about 10%-15% of total revenue. This is consistent with our estimates and factored into our unchanged $410 fair value estimate.

KLA dominates the process diagnostic and control segment of the semiconductor equipment industry. During the fabrication process, wafers must be inspected for defects and proper critical dimensions to identify and rectify problem sources. As customers continue pursuing Moore's Law, smaller chips must meet more precise specifications, which in turn increase the need for advanced PDC tools. These tools help customers improve semiconductor die yields, accelerate development and product ramps, and ultimately maximize profitability. We think KLA boasts a wide economic moat and is well positioned for healthy growth going forward.

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.

KLA dominates the process diagnostic and control segment of the semiconductor equipment industry. During the fabrication process, wafers must be inspected for defects and proper critical dimensions to identify and rectify problem sources. As customers continue pursuing Moore's Law, smaller chips must meet more precise specifications, which in turn increase the need for advanced PDC tools. These tools help customers improve semiconductor die yields, accelerate development and product ramps, and ultimately maximize profitability. We think KLA boasts a wide economic moat and is well positioned for healthy growth going forward.

On June 16, KLA’s management held an investor day to convey the firm’s future growth outlook along with detailed presentations on its business. We think the firm’s leading position in process diagnostic and control will continue to support solid revenue growth despite near-term macroeconomic concerns. Management called for calendar 2026 revenue to be in the range of $13.5 billion to $14.5 billion, which implies a compound annual growth rate of 9% to 11%. Although this outlook is more in line with our bull case scenario, our unchanged $396 fair value estimate does include solid growth for wide-moat KLA. Given KLA is highly leveraged to the strategic R&D investments by customers for leading-edge process technologies across all chip types, we think prospective investors should find shares of the firm attractive.

KLA dominates the process diagnostic and control segment of the semiconductor equipment industry. During the fabrication process, wafers must be inspected for defects and proper critical dimensions to identify and rectify problem sources. As customers continue pursuing Moore's Law, smaller chips must meet more precise specifications, which in turn increase the need for advanced PDC tools. These tools help customers improve semiconductor die yields, accelerate development and product ramps, and ultimately maximize profitability. We think KLA boasts a wide economic moat and is well positioned for healthy growth going forward.

KLA reported fiscal third-quarter sales above the midpoint of management’s guidance and in line with our estimates, led by continued strength in the foundry and logic segments and higher memory spending. Consistent with KLA’s peers and our internal estimates, management expects the wafer fab equipment market to top the $100 billion mark in calendar 2022 (up from $92 billion in 2021). Although the firm is dealing with supply chain constraints, management maintains its view that KLA will increase revenue over 20% in calendar 2022. KLA’s leading position in process diagnostic and control has served it well, as the firm is highly leveraged to the strategic research and development investments by customers for leading-edge process technologies across all chip types. We are maintaining our $396 fair value estimate for wide-moat KLA and think the shares look attractive at current levels.