KLA Corp

KLA's strong June-quarter results came in at the high end of guidance. Sales rose 15% year over year to $3.66 billion, and September-quarter guidance implies an acceleration to 25% year-over-year growth at the midpoint. Shares fell 10% after hours as negative momentum in AI tech stocks continues.

Why it matters: KLA is benefiting from investments in artificial intelligence and a massive expansion of chip supply over the next few years. We expect demand to continue accelerating through calendar 2027, which should drive continued robust growth and profitability. KLA's chipmaking customers, including TSMC and Micron, have massive capital spending plans through at least 2028. After 2028, the pace of the supply buildout appears more uncertain, particularly for memory, but we still expect healthy growth to follow the medium-term surge. KLA's lead times are long, at a year or longer, which should give investors some assurance of high demand continuing through at least 2027. After a correction from a share price peak in June 2026, we now see the market pricing in growth tapering after 2028, which we agree with.

The bottom line: We raise our fair value estimate for wide-moat KLA to $175 from $150, behind higher growth estimates in both the medium and long term. After a correction in its share price over the last month (with the after-hours dip following results continuing), KLA looks fairly valued to us. Shares are down more than 35% in the last month, fueled by broader market bearishness on AI tech stocks. We believe the previous peak pricing was overly optimistic and prefer the current entry point. Still, there's been no cut to KLA's fundamental opportunity, which is actually accelerating. We value KLA at roughly 20 times fiscal 2030 earnings, reflecting the supernormal growth we expect over the next five years from AI infrastructure investments.

Our fair value estimate for KLA is $175 per share. Our valuation implies a fiscal 2027 (ending June 2027) adjusted price/earnings multiple of 32 times and a fiscal 2027 enterprise value/sales multiple of 13 times. Against fiscal 2028 and fiscal 2030 earnings, our valuation implies price/earnings multiples of 26 times and 19 times, respectively. The greatest drivers to our valuation are growth in the WFE market and KLA’s ability to drive further share gains in process control.

We model 17% compound annual sales growth for KLA through fiscal 2031. We expect generative AI chip capacity investments to be the largest driver of growth. We see AI leading chipmakers to put out new chips that use more complex designs, including gate-all-around transistors, advanced packaging, and more ultraviolet lithography. We also expect AI to drive an increasing global chip supply to serve rising model sizes. We expect the strongest spending growth to occur between 2026 and 2028, where we anticipate more than 20% growth for KLA. Thereafter, we project growth tapering down to the lower double digits. We anticipate KLA’s services business will buffer cyclicality, as we anticipate this segment to continue growing as a result of KLA’s existing installed base. We project steady low-teens growth for services.

We project KLA to raise its non-GAAP gross margin to 64% in fiscal 2031, up from 62% in fiscal 2026, as it benefits from higher complexity lightly raising pricing power. We think operating margins will rise from operating leverage, as organic investment doesn’t keep up with rapid revenue growth. We model non-GAAP operating margin reaching 51% in fiscal 2031 (versus 43% in fiscal 2026).

Compared with KLA’s calendar 2030 targets given at its 2026 investor day, our model is in line. Its targets include revenue of $26 billion, non-GAAP gross margin of 63.5%, non-GAAP operating margin of 46%, and non-GAAP EPS of $8.40 (adjusted for the June 2026 split), at the midpoints. We come in above the non-GAAP operating margin target, and note that KLA has historically exceeded its long-term operating margin targets.

We assign KLA with a wide economic moat rating, on the basis of intangible assets and switching costs. KLA’s proficiency in semiconductor process control results from best-of-breed design expertise, in our view, and we think its embedded services business and long-term customer roadmaps are sticky. We also believe the sheer amount of investment required to remain at the forefront of leading chip development creates an immense barrier to entry to all except the largest and best-capitalized chip equipment manufacturers. We expect KLA to earn returns on invested capital well above its cost of capital, more likely than not, for the next 20 years.

We see KLA holding the most comprehensive portfolio of equipment for semiconductor process control in the world. KLA’s dozens of product lines run the gamut of chip manufacturing, able to serve logic and memory chipmakers alike with best-of-breed equipment, and offerings that span the cost and capability spectrum. Process control makes up just under 15% of the total wafer fabrication equipment market, and KLA dominates with a majority share, more than 4 times that of the nearest competitor. To us, this commanding share position is the result of the broadest and deepest portfolio for this corner of the market, continually fueled by a R&D budget of over $1 billion annually. This huge budget dwarfs all but the largest of WFE competitors and enables KLA to continue building its immense base of intangible assets. The strength of KLA’s offerings also results in stellar non-GAAP gross margins consistently in the low 60% range.

KLA’s portfolio strength helps it win customers, and we see it embedding in customers once installed. Chipmaking is extremely complicated and precise, with KLA’s machines inspecting roughly 8 trillion individual transistors, each as small as 5 nanometers wide, on a single 12-inch wide wafer. These inspections are calibrated to specific product lines, and chipmakers build workflows around their equipment with the singular goal of efficient production. KLA sends on-site service engineers to customer fabs to operate as an extension of the chipmakers engineering team. These service engineers help to calibrate equipment during R&D, tweak and fix bugs during production, and work with chipmakers on meeting manufacturing requirements. They also work on equipment upgrades or recalibration to repurpose equipment. The high complexity of KLA’s machines and the integration of its services engineers make it hard to replace, in our view.

Beyond the cost of purchasing new equipment (to the tune of $1 million or more per machine), chipmakers would need to redesign manufacturing workflows and learn wholesale new hardware and software interfaces, as well as restart knowledge sharing with new services engineers. KLA's equipment can last in the field for multiple decades, which generates deep connections with customer engineering teams and augments this stickiness. KLA's deep customer relationships also entail forward-looking project roadmaps up to 10 years out, giving the firm an unmatched leg up in winning new placements as it can target new machines to exact customer requirements. Finally, we see a virtuous cycle with KLA’s defect database, wherein its large installed base provides it with more data, which in turn benefits its customers and locks them in.

The combination of KLA’s robust portfolio, sticky customer relationships, and large ongoing investment give us confidence in the durability of its competitive position and healthy profitability. We believe this will allow it to continue earning strong economic profits, more likely than not, for the next 20 years and result in a wide economic moat.

KLA dominates the process control market within WFE, with a majority market share more than quadrupling that of its next closest competitor, Applied Materials.

Rising complexity in chips should drive demand for KLA’s equipment, including progression to chiplet-based designs, gate all-around transistors, and high-bandwidth memory. AI should accelerate this secular trend.

KLA posts the best profit margins of any WFE firm under our coverage.

KLA has a smaller budget than other giant WFE peers like Applied Materials and ASML, and risks losing market share if those firms were to invest more than it is able to.

KLA is prone to semiconductor industry cyclicality, which can lead to soft revenue growth and margin compression in downturns. KLA’s current valuation is also highly reliant on massive AI growth continuing through 2030.

KLA faces geopolitical risk arising from tensions between the US and China, which may further inhibit its ability to ship to Chinese chipmakers.