KLA Earnings: Solid Quarter in Soft Market; We Raise Our Valuation on Higher Long-Term Forecasts

We raise our fair value estimate for wide-moat KLA KLAC 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.

September quarter sales dropped 12% year over year but ticked up sequentially to $2.4 billion. We attribute the year-over-year decline to weaker overall WFE demand, particularly in NAND flash chips, but are encouraged by the sequential improvement, which we expect to continue through 2024. On the bright side, shipments for lagging-edge chips, especially into Chinese customers, were strong. KLA also raised its 2023 WFE market outlook to about $80 billion, which matches peer Lam Research’s update a week earlier. While this is positive, we see KLA’s results unaffected, as much of the raise comes from higher lithography sales from the likes of ASML.

Similar to sales, margins rose sequentially but declined year over year. Still, KLA’s profitability, with gross margins above 60% and operating margins above 40%, is nothing short of exceptional relative to other WFE peers. We expect margins to improve with rebounding volume in calendar 2024 and 2025.

December quarter guidance calls for sequential sales growth (to a midpoint of $2.45 billion) and roughly flat margins. Again, we see sequential growth against a tough market backdrop as positive. We anticipate growth in calendar 2024 and 2025 behind rebounding memory markets and long-term trends towards higher chip complexity.