Analyst Note| Abhinav Davuluri, CFA |
KLA reported fiscal third-quarter results at the high end of management’s guidance, led by continued strength in the foundry and logic segments and improved memory spending. While memory sales for KLA were down in fiscal 2019 and 2020, we expect memory customers to ramp up spending over the course of 2021. KLA’s leading position in process diagnostic and control has served it well, as the firm is highly leveraged to the strategic R&D investments by customers for leading-edge process technologies across all chip types. Ongoing technology transitions and the implementation of EUV lithography at major foundries such as TSMC require advanced optical inspection tools from KLA. TSMC’s substantial increase for its 2021 capital expenditure budget ($30 billion from $17.2 billion in 2020) also supports the case for another double-digit growth year for KLA in 2021. We are raising our fair value estimate for wide-moat KLA to $315 per share from $290 as we incorporate a stronger growth outlook for 2021 and beyond. We view shares as modestly overvalued.