KLA’s revenue rose 29% to a record $4.14bn in the September quarter, the December quarter is guided to $4.7bn, and management now expects wafer-equipment spending to pass $200bn next year with KLA growing faster. On the Street’s cycle to fiscal 2030, then three more years at the company’s own 13–17% growth model, the shares are worth $108.91 to $162.29, most likely $129.99. At $166.95 the price needs growth of about 15% a year from fiscal 2031 to 2037, or an 8.6% discount rate: it pays for the upswing and for the decade after it. We rate the shares overvalued.
The acceleration arrived, and supply was the brake. Revenue was $4.14bn in the September quarter, 29% above a year earlier, at a record 46.1% non-GAAP operating margin. The December quarter is guided to $4.7bn, 43% above a year earlier. Management said it could have shipped more all year; average lead times are about twelve months, and it now expects the wafer-equipment market to pass $200bn in 2027 with KLA growing faster than that market.
Margins and mix are the soft spots, not demand. Gross margin is guided at 62.5% for a fourth quarter running, held back by the memory chips KLA buys for its own tools; the 63–64% target has moved to mid-to-late 2027. China was 34% of the quarter but is guided to the low 20s in percent of revenue next year. Inventory rose 12% in three months, and free cash flow was 77% of net income over twelve months.
The price pays for the 2030s. Our base case runs close to consensus to fiscal 2030, then holds the company’s 13–17% growth model for three more years: $129.99 a share, band $108.91–$162.29, probability-weighted $129.89. Only about $21 of that comes from cash generated to fiscal 2030; $72 is the value after 2037. The price adds $37 on top, which needs an 8.6% discount rate or growth of about 15% a year from fiscal 2031 to 2037. We rate the shares overvalued.
At $166.95 KLA’s market value is about $218.1bn on 1,306.5m shares, and its enterprise value about $219.3bn once the $5.95bn of senior notes are added and $4.74bn of cash and securities taken away. That is 15.1 times trailing revenue, 42 times trailing GAAP earnings and 29 times our fiscal-2027 estimate of $5.81. Our base case gives the Street its cycle to fiscal 2030 — revenue of $19.0bn in fiscal 2027, $23.0bn in 2028 and a flat fiscal 2030 at $25.0bn — and then holds the company’s own 13–17% long-run growth model for three more years, to $35.8bn in fiscal 2033, before fading to 4% by fiscal 2037 ($46.9bn). The operating margin peaks at 48.5% and settles at 46%, with stock pay charged. That path is worth $129.99 a share, 22% below the price.
Run the model in Section 02 backwards and the price needs any one of four things, each on its own with everything else held at the base case. A discount rate of 8.55% instead of 10.0%. Or revenue 29.3% higher than our path in every year from fiscal 2028: $29.7bn in 2028, $36.6bn in 2031 and $60.6bn in 2037. Or an operating margin 12.9 points higher in every year from fiscal 2028, 59% in the long run against 46%. Or terminal growth of 5.3% instead of 3.0%. Held to our path until fiscal 2030, it needs growth of 15.2% a year from fiscal 2031 to 2037 against our 13% fading to 4%. Put plainly, the market is paying for the upswing and for something close to the company’s best decade repeated after it, with no allowance for the down year that equipment cycles have always included. The price sits just above our $108.91–$162.29 band, 2.9% above its top: overvalued.
The signature measure for KLA is the share price taken apart: how much of it our base case finds in cash generated in the next four years, how much in the seven after that, how much in the value after fiscal 2037, and how much the price adds on top. China’s share of revenue is drawn beneath it, on its own scale, because it is the part of the business most exposed to policy.
Top bar: model output, each segment a present value per share at 10.0%; net debt of $0.93 a share is deducted from the cash-flow segments and not drawn. China: Form 10-K for fiscal 2026 (revenue by ship-to location), the first-quarter fiscal 2027 letter to shareholders, and the 28 October 2026 call, where management guided China to roughly 27–29% of calendar-2026 revenue and the low 20s in 2027; the 2027 bar is indicative. Bars are drawn with 50% as the full width. The base case finds about 16% of its value in the next four years of cash; the price asks for $37 more on top of a value that is already mostly after 2030.
The second-quarter results in late January bring the calendar-2027 outlook, the first number that says whether KLA will grow faster than a wafer-equipment market management now puts above $200bn. TSMC’s 2027 capital-spending plan, due in mid-January, comes first. The second test is gross margin: guided at 62.5% for a fourth quarter running, with the 63–64% model now a mid-to-late-2027 target. A margin one point lower in every year is worth $2.95 a share.
The rate backdrop is not friendly to a long-duration story. The 10-year Treasury yield was 5.05% on 28 October, up from about 4.6% in late July. KLA’s two-year daily beta against the S&P 500 is about 2.0 and its thirty-day realised volatility about 50% annualised. We use a 10.0% discount rate in every case: on a mechanical CAPM reading the shares would warrant more, but KLA is investment-grade, carries net debt of only about $1.2bn and has the widest moat in the group, and the cycle, China and customer risks that drive its beta are carried in the scenarios and their weights rather than added to the rate. The band runs the rate from 9% to 11%.
FY2027–37 revenue CAGR · FY2037 operating margin after stock pay · FY2037 free cash flow · terminal value is of enterprise value · shares.
This is the model that produced every figure in this report, reduced to its nine moving parts. It is an unlevered discounted cash flow on a ten-year path of fiscal years, 2028 to 2037, with the rest of fiscal 2027 (October 2026 to June 2027) as a stub. KLA’s fiscal year ends on 30 June. Free cash flow to the firm is operating income after stock pay, after cash tax, plus depreciation, less capital spending, less working capital at 18% of each year’s added revenue. The valuation date is 29 October 2026; each year is discounted at its mid-point, and the Gordon terminal value at 3% on fiscal-2038 cash flow is discounted from the end of fiscal 2037. On base settings the terminal value is 55% of enterprise value. The scenario cards load whole published paths, and the sliders bend the loaded path rather than replace it, so each card reproduces its published value exactly.
Why these inputs. FY2028 revenue of $23.0bn (assumed). A calendar-2027 wafer-equipment market above $200bn, with KLA growing faster; the consensus before the results was $21.6–21.8bn. FY2029 of $25.0bn and a flat FY2030 (assumed). The consensus has fiscal 2030 flat on 2029; the company’s Investor Day model is about $26bn for calendar 2030. FY2031 of $28.3bn and FY2037 of $46.9bn (assumed). Growth of 13%, 13% and 12% in fiscal 2031–33, the company’s 13–17% model held for three years past its horizon, fading to 4% by 2037. Operating margin of 47.8% before stock pay in the long run (assumed), 46.0% after it: KLA’s non-GAAP operating margin keeps stock pay as a cost, and it was 46.1% in the September quarter; the base case peaks at 48.5% after stock pay in fiscal 2028–29. Stock pay of 1.8% of revenue (derived), about $84m a quarter. Working capital at 18% of added revenue (derived), about the September-quarter level. Discount rate 10.0% and terminal growth 3.0% (assumed), the same in every case.
What the controls hold fixed. The rest of fiscal 2027 is a fixed cash flow for each case. In the base case it is revenue of $4.70bn, $4.95bn and $5.20bn in the December, March and June quarters (the December guide midpoint, then our estimates) at a 47.8% non-GAAP operating margin and a 14.5% tax rate, with $175m of depreciation, $510m of capital spending and working capital that nets out the $164m already absorbed in September: $4,925m of free cash flow, discounted 0.33 years. Capital spending is $750m, $800m and $700m in fiscal 2028–30, inside the company’s range of $600–800m a year, then 2.5% of revenue. Depreciation rises from 1.5% of revenue to 2.2% and excludes the amortisation of acquired intangibles. The cash tax rate is 15% to fiscal 2030 and 16% after, with the Pillar Two minimum tax. The fair-value band in Section 03 is this model run across the discount rate and terminal growth, and every cell of that grid is reproducible from the two controls.
Derivations, base case. Shares 1,306.55m: the 10-K cover count of 3 August 2026, before the September quarter’s $936m of buybacks; the December guide uses about 1,306m diluted shares. Stock awards are charged through operating costs and are not added to the count. Net debt of $1,209m: $5,950m of senior notes at face (carrying value $5,723m after the fair-value adjustment on the $2.0bn swapped to floating) less $4,741m of cash, equivalents and marketable securities at 30 September 2026. Fiscal 2027 revenue of $18.99bn is the reported $4,136m first quarter plus the three quarters above.
The number above is not a fact about KLA Corporation. It is what these assumptions produce, and the two that decide it are not in any filing: how long revenue keeps growing at double digits after fiscal 2030, and the margin it earns while it does. The rating is a statement about the band, not this cell: it returns to fairly valued at $162.29 or below and changes to undervalued below $108.91, and the price is 28% above our base-case value. Move the FY2031 and FY2037 revenue settings and the margin until they are yours, and use the number that falls out.
Each card loads its published case into the model above and prints its value: $69.50, $129.99, $172.43 and $218.14. All four use the same 10.0% discount rate and 3.0% terminal growth, so they differ only in how much KLA sells, when, and at what margin; cycle, China and customer risk sit in the cases and the weights, not in the rate. Weighting the four at 25 / 45 / 25 / 5 gives $129.89.
| Input | Bear (25%) | Base (45%) | Bull (25%) | Super-bull (5%) |
|---|---|---|---|---|
| FY2027 revenue | $17.9bn | $19.0bn | $19.5bn | $20.0bn |
| FY2028 revenue | $19.0bn | $23.0bn | $24.6bn | $26.2bn |
| FY2029 revenue | $16.2bn | $25.0bn | $28.6bn | $31.7bn |
| FY2030 revenue | $17.0bn | $25.0bn | $30.6bn | $35.5bn |
| FY2033 revenue | $21.2bn | $35.8bn | $44.9bn | $54.0bn |
| FY2037 revenue | $24.6bn | $46.9bn | $61.0bn | $76.1bn |
| Operating margin, FY2028 / FY2030 / steady | 45.0 / 41.0 / 43.0% | 48.5 / 46.5 / 46.0% | 49.5 / 49.0 / 48.5% | 50.0 / 51.0 / 50.5% |
| Rest of FY2027: revenue, operating margin | $13.8bn, 46.5% | $14.8bn, 47.8% | $15.4bn, 48.2% | $15.8bn, 48.5% |
| Common to all | Discount rate 10.0% and terminal growth 3.0%; cash tax 14.5% for the rest of fiscal 2027, 15% to 2030 and 16% after; capital spending $510m for the rest of fiscal 2027, then $750m, $800m and $700m, then 2.5% of revenue; depreciation 1.5% of revenue rising to 2.2%; working capital 18% of added revenue; stock pay charged inside the operating margin; valued at 29 October 2026 from the 30 September 2026 balance sheet | |||
| Value per share | $69.50 | $129.99 | $172.43 | $218.14 |
Company figures: the December-quarter guide of $4.7bn ± $0.2bn and a 62.5% non-GAAP gross margin (28 October 2026); the Investor Day model of 12 March 2026, about $26bn of revenue in calendar 2030 and a 13–17% long-run growth rate. The consensus for fiscal 2028 before the results was $21.6–21.8bn. Operating margins are non-GAAP, which keeps stock-based compensation as a cost; KLA excludes only acquisition amortisation.
| $ millions, base case | Rest of FY27 | FY28 | FY29 | FY30 | FY31 | FY33 | FY35 | FY37 |
|---|---|---|---|---|---|---|---|---|
| Revenue | 14,850 | 22,973 | 25,041 | 25,041 | 28,296 | 35,811 | 42,544 | 46,900 |
| Growth (full year) | 40% | 21% | 9% | 0% | 13% | 12% | 8% | 4% |
| Operating margin | 47.8% | 48.5% | 48.5% | 46.5% | 47.0% | 46.0% | 46.0% | 46.0% |
| Operating income | 7,098 | 11,142 | 12,145 | 11,644 | 13,299 | 16,473 | 19,570 | 21,574 |
| Less cash tax | (1,029) | (1,671) | (1,822) | (1,747) | (2,128) | (2,636) | (3,131) | (3,452) |
| Plus depreciation | 175 | 345 | 401 | 451 | 538 | 752 | 936 | 1,032 |
| Less capital spending | (510) | (750) | (800) | (700) | (707) | (895) | (1,064) | (1,173) |
| Less increase in working capital | (809) | (718) | (372) | 0 | (586) | (691) | (567) | (325) |
| Free cash flow to the firm | 4,925 | 8,348 | 9,551 | 9,648 | 10,416 | 13,004 | 15,744 | 17,657 |
Sonde estimates. The rest of fiscal 2027 is the stub from 1 October 2026 to 30 June 2027; its growth is the full year against fiscal 2026 revenue of $13.58bn, and its working-capital line nets out the $164m already absorbed in the September quarter. Free cash flow from October 2026 to fiscal 2030 sums to $32.5bn.
| Base case | $m | Note |
|---|---|---|
| Present value of cash flows, Q2 FY2027–FY2037 | 76,643 | Mid-year convention, the rest of fiscal 2027 as a stub |
| Present value of terminal value | 94,404 | 55% of enterprise value; FY2038 free cash flow $18,268m at 10.0% less 3.0% |
| Enterprise value | 171,047 | |
| + Cash and marketable securities | 4,741 | 30 Sep 2026 |
| − Senior notes at face | (5,950) | Carrying value $5,723m |
| Equity value | 169,838 | |
| Shares, millions | 1,306.55 | 10-K cover, 3 Aug 2026; stock awards are charged through operating costs |
| Value per share | $129.99 |
The grid holds the base case fixed and varies the discount rate against terminal growth. Its corners are the published fair-value band, $108.91–$162.29: a WACC of 9–11% by terminal growth of 2.5–3.5%.
| WACC ↓ / terminal growth → | 2.5% | 3.0% | 3.5% |
|---|---|---|---|
| 9.0% | $146.20 | $153.57 | $162.29 |
| 9.5% | $134.82 | $140.85 | $147.89 |
| 10.0% base | $125.00 | $129.99 | $135.75 |
| 10.5% | $116.44 | $120.61 | $125.38 |
| 11.0% | $108.91 | $112.43 | $116.42 |
The $166.95 price lies above the grid, 2.9% above its highest cell: overvalued. The rating would return to fairly valued at $162.29 or below and change to undervalued below $108.91. Run across the same grid, the probability-weighted value spans $108.72–$162.33. The second table holds the rates at the base case and moves one input at a time:
| Change to the base case, all else held | Value | Change |
|---|---|---|
| Revenue 10% higher from FY2028 | $142.62 | +10% |
| Revenue 10% lower from FY2028 | $117.36 | −10% |
| Operating margin 1 point higher every year | $132.94 | +2% |
| Operating margin 1 point lower every year | $127.04 | −2% |
| Capital spending 25% higher | $128.90 | −1% |
| No flat year in FY2030 (growth spread more evenly) | $130.18 | +0% |
| A 12% fall in FY2030 instead of a flat year | $118.87 | −9% |
| Growth fading from FY2031 (10% down to 4%) | $116.04 | −11% |
| Revenue 8% lower throughout (China share halves, no offset) | $119.88 | −8% |
| Long-run tax rate 18% instead of 16% | $127.28 | −2% |
Modal base case $129.99, 22% below the price. Fair-value band $108.91–$162.29, the WACC 9–11% by terminal growth 2.5–3.5% grid, which anchors the rating; the price is above it: overvalued. Probability-weighted value $129.89 across the four cases at our own weights, 22% below the price. The weights balance: the bear sits $60.49 below the base and the bull $42.44 above it, with the super-bull’s $218.14 carrying 5% of the weight.
| Single input changed, all else at base | Price implies | Our base |
|---|---|---|
| Revenue from FY2028, every year | 29.3% higher | The Street to FY2030, then the company’s model |
| FY2028 revenue on that path | $29.7bn | $23.0bn |
| FY2031 revenue on that path | $36.6bn | $28.3bn |
| FY2037 revenue on that path | $60.6bn | $46.9bn |
| Revenue growth, FY2031–37, our path to FY2030 | 15.2% a year | 13% fading to 4% |
| Operating margin, FY2028–37, every year | +12.9 points; 59% long-run | 46.0% long-run |
| Discount rate | 8.55% | 10.0% |
| Terminal growth | 5.31% | 3.0% |
None of these is absurd, and the first two are what the market appears to be doing: valuing KLA as a business that compounds at double digits for a decade, at a discount rate well below what its beta would suggest. That is a reasonable bet on this company. It leaves no margin for a normal cyclical downturn: the base case already has one flat year, and a 12% fall in fiscal 2030 instead takes it to $118.87.
| Scenario | Value | Against price | Weight | Contribution |
|---|---|---|---|---|
| Bear | $69.50 | −58% | 25% | $17.38 |
| Base | $129.99 | −22% | 45% | $58.50 |
| Bull | $172.43 | +3% | 25% | $43.11 |
| Super-bull | $218.14 | +31% | 5% | $10.91 |
| Probability-weighted | $129.89 | −22% | 100% | $129.89 |
We weight the bear at 25% because wafer-equipment spending has had a down year every few years and this upswing is already the largest on record, because China is a third of the quarter and falling, and because a handful of leading-edge buyers drive much of the demand. We weight it no higher because the backlog was $12.57bn at 30 June, supply rather than demand has set the pace this year, and management is planning component supply for 2029 and 2030. Weights are our judgement, not a model output.
| Risk | Priced in | Not also in |
|---|---|---|
| Wafer-equipment downturn | The base case’s flat fiscal 2030; the bear’s 15% fall in fiscal 2029 and its 25% weight | The discount rate |
| China | Bear revenue; a sensitivity with revenue 8% lower throughout | The terminal growth rate |
| Memory costs and mix | Base margin easing from 48.5% to 46.0%; bear 43% | A separate cost line |
| Customer concentration | The scenario weights | The discount rate |
| Supply and customer readiness | Base growth sequential rather than stepped; the bull lifts it | Lost revenue (timing only) |
| Working-capital build | 18% of every added dollar of revenue, in every case | — |
| Tax | A 16% long-run rate; a sensitivity at 18% | — |
| Dilution | Stock pay inside operating costs; the current share count | Future buybacks (not credited) |
| $ millions | Value | Note |
|---|---|---|
| Market value | 218,128 | 1,306.55m shares × $166.95; 1,306,546,783 shares at 3 Aug 2026 (10-K cover) |
| + Senior notes at face | 5,950 | Carrying value $5,723m after the fair-value adjustment on $2.0bn swapped to floating |
| − Cash and marketable securities | (4,741) | 30 Sep 2026 |
| Enterprise value | 219,337 | Net debt about $1.2bn |
Source: Q1 FY2027 results release; Form 10-K for fiscal 2026 (cover share count, notes). Reference price $166.95, the last Nasdaq trade at 9:51 a.m. Eastern on 29 October 2026.
| Measure | KLAC | Basis |
|---|---|---|
| EV / trailing revenue | 15.1× | $14,506m, Q2 FY2026 to Q1 FY2027 |
| EV / trailing EBITDA | 33.3× | GAAP operating income $6,185m plus depreciation and amortisation $394m |
| P/E, trailing GAAP | 41.7× | $4.00 |
| P/E, FY2027 | 30.6× / 28.7× | Consensus before the results $5.46 / our base $5.81 (non-GAAP) |
| P/E, FY2028 | 24.8× / 22.9× | Consensus $6.74 / our base $7.28 |
| PEG, FY2027 | 1.30 | Consensus FY2028 earnings growth 23% |
| Price / trailing free cash flow | 54.0× | $4,038m |
| Free-cash-flow yield | 1.9% | Trailing twelve months |
| Dividend yield | 0.55% | $0.23 a quarter |
Consensus: Yahoo Finance, mid-October 2026, before the results. Our base fiscal 2027 adds the December guide midpoint and our March and June quarters to the reported September quarter; earnings per share are non-GAAP, which keeps stock pay as a cost.
| Company | Mkt value | EV | Latest-qtr growth | Op. margin | EV / sales | EV / EBITDA | P/E | P / FCF |
|---|---|---|---|---|---|---|---|---|
| KLA Corporation $166.95 | $218.1bn | $219.3bn | +29% | 45.0% | 15.1× | 33.3× | 41.5× | 54.0× |
| Applied Materials $416.00 | $330.1bn | $327.3bn | +25% | 33.7% | 10.6× | 33.9× | 35.6× | 58.7× |
| Lam Research $253.82 | $317.1bn | $313.4bn | +54% | 40.0% | 12.0× | 31.0× | 37.5× | 48.5× |
| ASML $1,662.85 | $637.0bn | $625.0bn | +55% | 44.4% | 14.2× | 34.5× | 42.4× | 27.2×* |
| SOXX aggregate 28 Oct 2026 close | — | — | — | — | P/S 11.2× | — | 39.9× | — |
Trailing-twelve-month figures from each company’s last four reported quarters (SEC XBRL and releases): KLA and Lam to September 2026, Applied to July 2026, ASML to 27 September 2026. KLA at the reference price; peers at their 28 October 2026 closes. Share counts: KLA 10-K cover (3 Aug 2026), Applied 10-Q cover, Lam 10-Q cover (20 Oct 2026), ASML third-quarter basic weighted average (383.1m; no cover count is published). Net debt: cash and short-term investments less debt from each latest balance sheet; Applied excludes $5.27bn of long-term investments. ASML is computed in euros and converted at US$1.1155; its debt is the €1.96bn of long-term debt, and its net income includes a €510m gain on equity investments. *ASML free cash flow is inflated by about €5.7bn of customer prepayments received in the third quarter. Growth and margins are GAAP for the latest quarter. SOXX: Sonde aggregate P/E and P/S built from fund holdings, 28 October 2026.
Cheap, fair or expensive? In line with the group, which is itself expensive; on our cash flows, expensive. KLA trades at 15.1 times trailing sales and 42 times trailing earnings, against about 11–14 times sales and 36–42 times earnings for Applied, Lam and ASML, and 40 times for the semiconductor index. It earns the highest operating margin of the four, but it grew more slowly than Lam and ASML in the latest quarter, because they sell more of the capacity tools that new fabs buy first. On next year’s earnings the picture is friendlier: about 29 times our fiscal-2027 figure and 23 times fiscal 2028. What justifies the premium to the market is durability more than growth: a wide moat, a services line that grows through downturns and the industry’s best margins have meant that KLA’s earnings fell less than its peers’ in past corrections. Free cash flow is the weaker measure: at 54 times trailing free cash flow the shares are dearer than on earnings, because working capital is absorbing part of the growth. Because KLA trades in line with its peers rather than at a discount, the DCF does not lean on any peer discount; cycle, China and margin risks are priced once, in its scenarios.
| What would expand the multiple | What would compress it |
|---|---|
| A January outlook that sizes 2027 growth above the wafer-equipment market | A pause in AI-related data-centre spending |
| Gross margin back above 63% | A reset in memory makers’ capital spending |
| Evidence that the upswing extends into 2028 | New export restrictions on China |
| Falling long-term interest rates | The first quarter in which backlog shrinks |
The base case holds the company’s 13–17% growth model for three years beyond its 2030 horizon (13%, 13% and 12% in fiscal 2031–33); with growth fading from fiscal 2031 instead, the base would be $116.04. Consensus figures for fiscal 2027 and 2028 ($5.46 and $6.74 of earnings per share) predate the first-quarter results. The March and June quarters of fiscal 2027 ($4.95bn and $5.20bn) are our estimates. The Form 10-Q for the September quarter had not been filed: the share count is the 10-K cover figure of 3 August, before the September-quarter buybacks, and backlog at 30 September is not yet disclosed. Depreciation excludes acquisition amortisation, whose tax shield is ignored. Terminal value is 55% of enterprise value, so the long-run growth and margin assumptions carry much of the answer.
KLA reported its first quarter of fiscal 2027, the three months to 30 September 2026, on 28 October after the close, and held its call the same day. Rick Wallace, president and chief executive, and Bren Higgins, chief financial officer, took questions. The shares closed at $158.77 before the release; the reference price in this report is $166.95, the last Nasdaq trade at 9:51 a.m. Eastern on 29 October 2026. The Form 10-Q for the quarter had not been filed when this report was published.
| Q1 FY2027 | Value | Change | Why it matters |
|---|---|---|---|
| Revenue | $4,136m | +13% q/q; +29% y/y | Above the $4.0bn guided midpoint |
| Semiconductor process control | $3,754m | +15% q/q; +29% y/y | The core franchise; 91% of revenue |
| Services | $850m | +4% q/q; +14% y/y | 20% of revenue; a seventeenth straight year of growth in view |
| Non-GAAP gross margin | 62.7% | +0.3 pts q/q | Guided at 62.5% again for December |
| Non-GAAP operating margin | 46.1% | +2.4 pts q/q | A company record |
| Non-GAAP diluted EPS | $1.22 | from $1.05 in Q4 FY2026 | Guide was $1.16; consensus about $1.18 |
| GAAP diluted EPS | $1.18 | from $1.04 | The gap is amortisation and a Pillar Two tax charge |
| Free cash flow | $1,336m | from $817m | A record; 86% of net income |
| Capital returned | $1,241m | from $876m | $936m of buybacks |
| China, share of revenue | 34% | FY2026: 29.8% | Guided lower in December and in 2027 |
| Inventories | $4,090m | +12% q/q | Material bought ahead of the ramp |
| Cash and marketable securities | $4,741m | (3)% q/q | Against $5.95bn of notes |
Sources: Q1 FY2027 and Q4 FY2026 results releases and letters to shareholders. Consensus as compiled by Investing.com and Yahoo Finance before the results.
One: the second-half acceleration is real. Revenue rose 13% on the June quarter and the December guide adds another 14%. Management puts the second half of calendar 2026 about 25% above the first and expects revenue to rise sequentially for several more quarters, more evenly than this year.
Two: 2027 is set up as a record. Wafer-equipment spending is now expected in the mid-$150bn range for 2026, including advanced packaging, and above $200bn for 2027. Asked directly whether KLA would grow faster than a market up roughly 30%, the chief executive answered that it can outgrow it, citing more 2nm and first 1.4nm investment, greenfield DRAM fabs, high-bandwidth memory and packaging.
Three: supply, not demand, has been the limit. The chief financial officer said he had been short of supply all year and could have shipped more; optical components set the pace, lead times average about twelve months and are longer for the newest platforms, and component output is rising month by month. Some customers have asked for deliveries and then put them on hold because their own clean rooms are not ready.
Four: gross margin waits for memory prices. The December guide is 62.5% again. Memory for KLA’s image computers is the headwind, with lower-margin packaging and PCB growth adding to it. Scale, memory-efficient designs and pricing on new products should bring the 63–64% model back from the middle to the second half of 2027 into 2028; on a like-for-like mix, process control could trend back toward the mid-60s.
Five: the 2030 plan already looks stale. Management called its 2030 wafer-equipment assumption very conservative and said the model’s assumptions will be exceeded before 2030. It is planning supply with key vendors for 2029 and 2030, adding head count at every site, and expects capital spending of $600–800m a year.
Every reportable line except specialty process grew. Semiconductor process control rose 15% on the quarter, driven by wafer inspection (+19%) and patterning (+18%); within its systems revenue the mix was about 72% foundry and logic and 28% memory. PCB and component inspection was flat on the quarter but 43% above a year earlier on AI package and board complexity. Non-GAAP gross margin rose 0.3 points to 62.7% while operating expenses barely moved, so about 64% of the extra revenue reached operating income. The non-GAAP tax rate was 14.1%.
December quarter: revenue $4.7bn ± $0.2bn; non-GAAP gross margin 62.5% ± 1 point; operating expenses about $710m; other expense about $25m; a 14.5% tax rate; non-GAAP earnings per share $1.44 ± $0.11 and GAAP $1.41 ± $0.11 on about 1,306m shares. Within process-control systems sold to chipmakers the mix shifts to about 60% foundry and logic and 40% memory, with DRAM 84% of memory. China should fall as a share of revenue. A fuller 2027 outlook comes with the January results.
The tone was confident and unusually expansive about the length of the cycle. The chief executive spoke of customers laying out multi-year investment plans and asking KLA to prioritise their projects; the chief financial officer was direct about the supply shortfall and the margin drag, and careful not to quantify 2027 beyond the market estimate. Both returned more than once to the same caution: tools are only one bottleneck, and clean rooms and power can stretch the timing.
| Firm | Question | Answer, in short |
|---|---|---|
| Goldman Sachs | How does 2027 shape up, and can KLA outgrow a market near 30%? | Supply is in place and the set-up is leading-edge centric; sequential growth for several quarters, more linear than 2026. |
| JPMorgan | Can gross margin get back above 63% in a strong 2027? | Memory stays a headwind and mix hurts; scale, memory optimisation and pricing bring the 63–64% model back mid-to-late 2027 into 2028. |
| Cantor Fitzgerald | When does process-control margin return to the mid-60s? How are lead times? | On a consistent mix, in the second half of 2027 as new-product deals are struck; lead times about twelve months. |
| UBS | Will KLA grow faster than the market in 2027? Why is DRAM so strong? | “We think we can outgrow next year.” DRAM intensity is rising; some products approach leading-edge logic. |
| TD Cowen | How high can wafer equipment go? | The 2030 assumption now looks very conservative; KLA is planning supply for 2029–30. |
| Bernstein | Why not reach the 2030 revenue model in 2027? Are incremental margins higher now? | Services and share assumptions are not there yet; at about 20% growth, incremental margins run at the top of 40–50% or above. |
| Wells Fargo | Why was capital spending a record? | A large land purchase in India for a new campus; $600–800m a year ahead. |
| Deutsche Bank | Could the December guide have been higher with more supply? | “I could absolutely have shipped more”; optics set the rate and output is improving month by month. |
| Wolfe Research | What constrains 2028? What about China? | Customer clean rooms, power and materials; China 27–29% of 2026 revenue and the low 20s in 2027. |
| Morgan Stanley | Do packaging customers need higher-sensitivity tools? | Yes: hybrid bonding pulls demand toward higher-end platforms where KLA leverages front-end R&D. |
Paraphrased from the published third-party transcript of the 28 October 2026 call (TradingKey); short quotations are exact. Financial figures are checked against the results release.
| Positive surprises | Negative surprises |
|---|---|
| A December revenue guide of $4.7bn against about $4.49bn expected, and earnings of $1.44 against about $1.36 | Gross margin guided flat at 62.5% on 14% more revenue |
| A first-ever operating margin above 46% | The 63–64% margin target pushed to mid-to-late 2027 |
| Wafer equipment above $200bn in 2027, and KLA expecting to outgrow it | Inventory up 12% in a quarter; memory bought at higher prices |
| Record free cash flow and the second-largest quarter of buybacks | China 34% of revenue, the part most exposed to export rules |
| Services at the top of the 13–15% growth model | Customer facility delays already holding back some deliveries |
What to watch next: the Form 10-Q, for the September backlog figure and the share count; the January results and calendar-2027 outlook, including whether management sizes 2027 growth against the $200bn-plus market; TSMC’s 2027 capital-spending guide in January; the gross-margin path through the first half of 2027 as memory contracts reprice; China as a share of the December quarter; and any change to export rules.
A modern chip passes through somewhere between several hundred and well over a thousand manufacturing steps. KLA makes the machines that check the work between those steps: optical and electron-beam inspection that finds defects on wafers and on the masks used to print them, metrology that measures film thickness and pattern placement, and software that ties the data into yield management. It does not deposit, etch or print anything; that is the business of Applied Materials, Lam Research, Tokyo Electron and ASML. KLA measures, and it holds the dominant share of that segment of wafer-fab equipment.
Revenue comes from three places. Systems are sold to chipmakers when they add capacity or move to a new process generation, so they follow the equipment cycle. Services, $850m in the quarter and 20% of revenue, maintain and upgrade an installed base whose tools now stay in use for decades; the line has grown for sixteen straight years and is on track for a seventeenth. Two smaller segments sell process tools for specialty chips and inspection systems for printed circuit boards and chip packages. KLA’s fiscal year ends on 30 June, and per-share figures reflect the ten-for-one stock split of 11 June 2026.
| $ millions | Q1 FY27 | Q4 FY26 | Q1 FY26 | Change q/q | Change y/y | Share |
|---|---|---|---|---|---|---|
| Semiconductor process control | 3,754 | 3,257 | 2,899 | +15% | +29% | 91% |
| Specialty semiconductor process | 139 | 160 | 120 | (13)% | +16% | 3% |
| PCB and component inspection | 242 | 241 | 189 | 0% | +28% | 6% |
| Total revenue | 4,136 | 3,658 | 3,210 | +13% | +29% | 100% |
Source: Q1 FY2027 results release, segment information (28 October 2026). Changes derived.
| By product, Q1 FY27 | Share of revenue | Change q/q | Change y/y |
|---|---|---|---|
| Wafer inspection | 51% | +19% | +37% |
| Patterning Metrology and reticle inspection | 21% | +18% | +29% |
| Services | 20% ($850m) | +4% | +14% |
| PCB and component inspection systems | 4% | 0% | +43% |
| Specialty semiconductor process systems | 3% | (17)% | +13% |
| Other | 1% | — | — |
Source: Q1 FY2027 letter to shareholders. Within semiconductor process control systems, the September quarter was about 72% foundry and logic and 28% memory; the December guide is 60% and 40%, with DRAM 84% of memory.
| Region, share of revenue | FY2024 | FY2025 | FY2026 | Q1 FY27 |
|---|---|---|---|---|
| China | 42.8% | 33.3% | 29.8% | 34% |
| Taiwan | 17.7% | 26.4% | 26.8% | 25% |
| Korea | 9.2% | 11.9% | 13.5% | 12% |
| North America | 10.9% | 11.2% | 13.0% | 15% |
| Japan | 9.8% | 9.3% | 6.7% | 4% |
| Europe and Israel | 5.6% | 4.7% | 5.4% | 5% |
| Rest of Asia | 4.0% | 3.2% | 4.8% | 5% |
Source: Form 10-K for fiscal 2026 (revenue by ship-to location); Q1 FY2027 letter to shareholders.
Two shifts stand out. China, which bought 43% of KLA’s output in fiscal 2024 while it stocked up on mature-node equipment, fell to 30% in fiscal 2026 as export rules tightened and the rest of the world accelerated; it was 34% of the September quarter and is guided lower from here. Taiwan and Korea grew instead, on leading-edge logic and on memory for AI systems. TSMC was the only customer above 10% of revenue in each of the last three fiscal years.
| $ millions | Q1 FY26 | Q2 FY26 | Q3 FY26 | Q4 FY26 | Q1 FY27 |
|---|---|---|---|---|---|
| Revenue | 3,210 | 3,297 | 3,415 | 3,658 | 4,136 |
| of which services | 745 | 786 | 775 | 820 | 851 |
| GAAP gross margin | 61.3% | 61.4% | 61.1% | 61.4% | 61.9% |
| GAAP operating income | 1,337 | 1,362 | 1,408 | 1,554 | 1,862 |
| GAAP operating margin | 41.7% | 41.3% | 41.2% | 42.5% | 45.0% |
| GAAP net income | 1,121 | 1,146 | 1,201 | 1,363 | 1,549 |
| GAAP diluted EPS | $0.85 | $0.87 | $0.91 | $1.04 | $1.18 |
| Operating cash flow | 1,162 | 1,368 | 707 | 906 | 1,531 |
| Free cash flow | 1,066 | 1,262 | 622 | 817 | 1,336 |
Source: Q1 FY2026 to Q1 FY2027 results releases. Operating income and margins derived from the statements of operations (revenue less cost of revenue, R&D and SG&A). Non-GAAP gross margin, which excludes acquisition amortisation, was 62.4% in Q4 FY2026 and 62.7% in Q1 FY2027.
| $ millions | Q1 FY27 | Q4 FY26 | Twelve months to Sep 2026 |
|---|---|---|---|
| Operating cash flow | 1,531 | 906 | 4,512 |
| Capital expenditures | (195) | (89) | (475) |
| Free cash flow | 1,336 | 817 | 4,038 |
| Share repurchases | (936) | (571) | (2,680) |
| Dividends | (305) | (305) | (1,109) |
| Tax withheld on vested stock awards | (239) | (114) | — |
| Inventory build (cash-flow statement) | (434) | (212) | — |
| Free cash flow / GAAP net income | 86% | 60% | 77% |
Source: Q1 FY2027 and Q4 FY2026 results releases, statements of cash flows and free-cash-flow reconciliation. Conversion derived.
Free cash flow was a record $1.34bn, 86% of net income, after capital spending that included a land purchase for a new campus in India. KLA returned $1.24bn, $936m of it in buybacks, its second-largest quarter of repurchases after the $3bn accelerated programme of 2022. Over twelve months free cash flow was $4.04bn and capital returns $3.79bn. Working capital is the drag: inventory rose $442m in the quarter to $4.09bn, and purchase commitments, swollen by memory-chip procurement, stood at $5.97bn in June. Cash and marketable securities were $4.74bn against $5.95bn of notes, so net debt is about $1.2bn.
Equipment demand is being pulled by AI: leading-edge logic at 2 and 1.4 nanometres, new DRAM fabs for high-bandwidth memory, and advanced packaging that now uses front-end-like processes. All three raise process-control intensity, the share of equipment spend that goes to inspection and measurement, because the chips are larger, more valuable and less tolerant of defects. Management put KLA’s share of wafer-equipment spend at about 7.5% in 2025, with 9% the goal for 2030. The constraint is physical: on its October call Lam Research pointed to shortages of critical parts and certified clean-room space, which investors read as a cap on equipment deliveries into 2027, and KLA’s own lead times average about twelve months.
Applied Materials is the nearest rival in inspection and metrology but holds a small fraction of KLA’s share; ASML competes in e-beam inspection and overlay metrology; Hitachi High-Tech in review microscopes; Onto Innovation in packaging and specialty metrology; and Chinese suppliers at mature nodes behind a domestic-content push. Lam, Applied, Tokyo Electron and ASML are valuation peers more than competitors: they sell into the same budgets but make different tools.
Leading-edge logic: more 2nm and first 1.4nm investment in 2027 than in 2026, when spending centred on 3nm. Memory: greenfield DRAM fabs and high-bandwidth memory; management says DRAM inspection intensity in some products now approaches leading-edge logic. Advanced packaging: about $1.1bn in 2026, up more than 70% and growing nearly twice as fast as the packaging market, with hybrid bonding moving demand to higher-sensitivity tools. Services: a larger installed base running at high utilisation, at the top of the 13–15% growth model. Pricing on new tools: management expects to share the value of new capabilities in price, which with scale should offset memory costs from mid-2027.
| Risk | Severity | Why it matters here |
|---|---|---|
| Wafer-equipment cycle | HIGH | The industry has had a down year every few years (KLA revenue fell 7% in fiscal 2024). The shares already price growth well past the current upswing. |
| China | HIGH | 29.8% of fiscal-2026 revenue and 34% of the September quarter; export rules have tightened repeatedly since 2022 and Beijing pushes domestic equipment. Guided to the low 20s in 2027. |
| Customer concentration | MED-HIGH | TSMC was the only customer above 10% of revenue in each of the last three fiscal years; leading-edge logic is a handful of buyers, funded by a handful of cloud budgets. |
| Input costs and mix | MEDIUM | Memory prices for KLA’s own image computers hold gross margin at 62.5%; faster-growing packaging and PCB lines carry lower margins. |
| Supply and customer readiness | MEDIUM | Optical components set the shipping rate; customers’ clean rooms, power and materials can delay deliveries even when tools are ready. |
| Tax | LOW | The planning rate is 14.5%; Pillar Two minimum-tax rules added $20m in the quarter and could stay if the US safe harbour is not adopted. |
| Competition | LOW | Applied Materials, ASML (e-beam), Hitachi High-Tech, Onto and Chinese domestic suppliers attack niches; none is near KLA’s share. |
Severity is our judgement.
| Source | Score / 5 | Assessment | Limit |
|---|---|---|---|
| Switching costs | 5 | Tools are qualified into a customer’s process recipe; replacing one means re-baselining yield on a multibillion-dollar line | Weaker at mature nodes |
| Intellectual property | 5 | Optics, illumination, detectors and defect libraries built over decades; know-how more than patents | Not immune to state-funded catch-up at old nodes |
| Scale | 4.5 | The largest share of process control by a wide margin; R&D of about $1.6bn a year spread over it | Applied and ASML are larger companies overall |
| Distribution and service | 4.5 | A global field organisation and a services line growing for seventeen years | Customers can self-maintain older tools |
| Customer loyalty | 4.5 | Tool-of-record status at every leading chipmaker | Leading-edge buyers are few and powerful |
| Data | 4 | Fab-wide yield software and defect data that improve with the installed base | Customers own their process data |
| Brand | 3.5 | The default name in inspection and metrology | Engineers buy on specification, not name |
| Cost advantage | 3.5 | Amortises R&D and service over the largest base | Limited pricing power against memory-cost inflation this year |
| Regulation | 3 | Export controls deny Chinese fabs the leading-edge alternatives | And cost KLA part of its largest market |
| Network effects | 1.5 | Some ecosystem effect through yield software | Not a real network |
Scores are our judgement. Composite about 3.9 / 5.
| KLA | Applied Materials | ASML | Lam Research | |
|---|---|---|---|---|
| Core business | Process control | Deposition, etch, implant; some inspection | Lithography; e-beam inspection | Etch and deposition |
| Overlap with KLA | — | The nearest rival in inspection and metrology | E-beam inspection, overlay metrology | Little; a peer, not a rival |
| Latest-quarter growth | +29% | +25% | +55% | +54% |
| Latest gross margin | 61.9% | 50.3% | 57.5% | 52.3% |
| Latest operating margin | 45.0% | 33.7% | 44.4% | 40.0% |
Sources: latest results releases (KLA and Lam Research: September 2026 quarter; Applied Materials: July 2026 quarter; ASML: third quarter of 2026). GAAP margins.
The strongest advantages are switching costs and accumulated know-how. An inspection tool is not bought once and swapped later; it is designed into a process at a given node and its data become part of how the fab runs. Competing requires both the optics and decades of defect learning, which is why the largest equipment companies in the world have overlapped with KLA for years without displacing it. KLA also earns the highest gross and operating margins among the large equipment makers, a sign that customers pay for the measurement rather than for the hardware.
The biggest threats are three, in order. First, China: process control is where Chinese suppliers are furthest behind, but they need only be adequate at mature nodes behind a domestic-content mandate, and that market is closed to KLA in part by US policy. Second, customer power: a handful of leading-edge buyers can dual-source where a second supplier is close enough. Third, the cost side: this year showed that KLA cannot pass input-cost spikes through on existing orders, only on new products.
Expanding, stable or shrinking? Expanding at the leading edge, in memory and in packaging, where intensity is rising and the newest tools carry the most value; stable in services; shrinking at mature nodes in China. Net: a wide moat, slightly wider than a year ago.
| Concern | Severity | Evidence and why it matters |
|---|---|---|
| Peak margin, peak cycle | HIGH | A record 46.1% operating margin as wafer-equipment spending heads for a record above $200bn. Equipment cycles have always included down years; KLA revenue fell 7% in fiscal 2024 |
| China | HIGH | 34% of the September quarter and 29.8% of fiscal 2026. Export rules have tightened repeatedly since October 2022, most recently in September 2025 (affiliates of listed entities); Beijing is pushing domestic equipment |
| Working capital | MEDIUM | Inventories $4.09bn at 30 September, up 27% from June 2025; purchase commitments $5.97bn in June, raised partly to secure memory chips at higher prices. Free cash flow was 77% of net income over twelve months |
| Customer concentration | MEDIUM | TSMC was the only customer above 10% of revenue in fiscal 2024, 2025 and 2026; leading-edge logic is a few buyers whose demand traces back to a few cloud budgets |
| Gross margin stalled | MEDIUM | Guided at 62.5% for a fourth quarter running while revenue grows 29%; the 63–64% model is now a mid-to-late-2027 target |
| Insider selling | LOW | About $65m sold by six officers between 4 August and 15 September 2026, all under 10b5-1 plans, including about $30m by the chief executive; about $112m over twelve months. No open-market purchases |
| Tax | LOW | A Pillar Two undertaxed-profits charge of $20m in the quarter, expected to reverse only if a US safe harbour is adopted; $258m of unrecognised tax benefits |
| Leverage | LOW | $5.95bn of notes ($2.0bn swapped to floating) against $4.74bn of cash and securities; investment-grade at all three agencies |
| Earnings quality | LOW | GAAP and non-GAAP earnings differ by $0.04 a share (amortisation and tax); stock-based compensation is kept in the non-GAAP figures |
Sources: Q1 FY2027 results release and letter; Form 10-K for fiscal 2026; Forms 4 filed 4 August to 16 September 2026 and over the prior twelve months; the 28 October 2026 call.
Overall red-flag score: 4.5 / 10. Nothing here suggests the accounts are unreliable. Revenue converts to cash, the GAAP-to-non-GAAP gap is small and stock pay is not adjusted away. The score is driven by where the cycle is, by China, and by a working-capital build that is defensible only if the ramp continues.
| Strength | Weight | Evidence |
|---|---|---|
| Backlog and lead times | HIGH | Backlog of $12.57bn at 30 June 2026, up from $7.86bn a year earlier, and still growing; lead times about twelve months. Much of the 2027 revenue is already spoken for |
| Supply catching up | HIGH | The first half of 2026 was supply-bound; component output is now rising month by month, which is what lifted the December guide |
| Rising intensity | HIGH | DRAM inspection intensity approaching leading-edge logic in some products; packaging process control about $1.1bn in 2026, growing nearly twice as fast as its market |
| Services | HIGH | $850m a quarter, 20% of revenue, at the top of the 13–15% model |
| Operating leverage | MEDIUM | Incremental margins at the top of 40–50% or above at about 20% growth; the operating margin rose 2.4 points in one quarter |
| Capital return | MEDIUM | More than 90% of free cash flow returned by design; diluted shares down 1.0% in a year to 1,311m |
| A conservative long-range plan | MEDIUM | Management calls its own 2030 market assumption very conservative and says the model will be exceeded before 2030 |
Overall green-flag score: 7 / 10. The strongest signal is the combination of a record backlog with a supply constraint that is easing. Revenue in the first half of 2026 was limited by what KLA could build, not by what customers wanted, so part of the 2027 growth is already booked rather than forecast.
| Dimension | Score / 5 | Assessment |
|---|---|---|
| CEO track record | 4.5 | Rick Wallace has been chief executive since 2006; he has run the company through several cycles, the Orbotech acquisition and the shift to packaging and services |
| CFO credibility | 4.5 | Bren Higgins was specific on supply, margin drivers, capital spending and China, and declined to quantify 2027 before January rather than guess |
| Guidance accuracy | 4.5 | Revenue above the guided midpoint in each of the last five quarters; earnings per share above the midpoint in each of the last three |
| Transparency | 4 | A detailed letter every quarter with end-market, product and regional mix; backlog is disclosed only annually |
| Capital allocation | 4 | More than 90% of free cash flow returned; $9.74bn of buyback authority left at 30 June, before the September quarter’s $936m |
| Acquisitions | 3.5 | Orbotech (2019) broadened the portfolio; its PCB business required a goodwill and intangibles impairment of $239m in fiscal 2025 |
| Buybacks | 3.5 | Large and consistent, including at prices well above today’s; they shrink the share count but turn cash into a bet on the multiple |
| Dilution | 4.5 | Diluted shares down about 1% a year; stock awards kept as a cost in non-GAAP results |
| Insider ownership | 3 | Officers and directors sold about $112m in twelve months, almost all under 10b5-1 plans; no open-market purchases |
| Compensation | 3.5 | Standard performance and time-based restricted stock; nothing unusual in the filings reviewed |
| Board quality | 4 | Nine nominees, most independent, with recent refreshment |
| Communication | 4.5 | Plain, consistent framing across quarters; candid about supply shortfalls and cost headwinds |
Composite about 4.0 / 5. Sources: results releases and calls for fiscal 2026 and Q1 FY2027; Form 10-K for fiscal 2026; 2026 proxy statement; Forms 4.
Do they act like long-term owners? As operators, clearly. KLA spent the last year investing in supply, head count and facilities ahead of demand it could see in its backlog, and it is now planning component supply for 2029 and 2030. Its capital-return policy is explicit and has been followed through the cycle. Ownership is the weaker part: executives are steady sellers under pre-arranged plans and none bought during the drawdowns of this year, so alignment runs through compensation rather than through personal capital.
| Window | Event | What it decides | Impact · source |
|---|---|---|---|
| Early Nov 2026 | Form 10-Q for the September quarter | Backlog at 30 September and the share count after the $936m of buybacks | Medium · estimated |
| 4 Nov 2026 | Annual meeting | Routine | Low · proxy statement |
| Mid-Nov 2026 | Applied Materials fiscal-year results | Read-across on a $200bn market, China and memory | Medium · estimated |
| Mid-Jan 2027 | TSMC fourth-quarter results and 2027 capital-spending plan | Whether leading-edge logic steps up in 2027 | Very high · estimated |
| Jan 2027 | ASML and Lam Research results | Orders for 2027 and whether supply still limits deliveries | High · estimated |
| Late Jan 2027 | KLA second-quarter results and calendar-2027 outlook | Whether KLA sizes 2027 growth above the market; gross margin against 62% | Very high · company |
| Jan–Feb 2027 | Memory makers’ 2027 spending plans | Greenfield DRAM and high-bandwidth memory are a large part of the 2027 case | High |
| Rolling | US export-rule changes | China is 34% of the September quarter | High |
| Late Apr 2027 | KLA third-quarter results | The first test of the gross-margin recovery; dividend and buyback increases have come in the April quarter | High · estimated |
| Mid-to-late 2027 | Gross margin back to 63–64% | Memory prices and pricing on new products | High · company |
| Aug 2027 | Fiscal 2027 Form 10-K | Backlog, China share and customer concentration for the full year | Medium · estimated |
| Uncertain | Pillar Two safe harbour | Would reverse the undertaxed-profits charge | Low |
| Rolling | Long-term interest rates | A large share of the value lies beyond 2030, so rates move the price more than most estimates | High |
Sources: Q1 FY2027 letter and call; 2026 proxy statement (annual meeting date); Q3 FY2026 results release (the April 2026 dividend and buyback announcement). Timings marked estimated are inferred from past reporting patterns.
BULLThe quarter. Twenty-nine percent growth, a guide that implies forty-three, a record operating margin and a backlog that has gone from $7.9bn to $12.6bn in a year. The constraint was KLA’s own supply, and that is easing. This is the start of the strongest equipment cycle on record, not the end of it.
BEAREvery one of those numbers is a peak-cycle number. Wafer equipment above $200bn next year, margins at an all-time high, and the shares already at 29 times this year’s earnings. Equipment cycles end; this industry has had a down year every few years for as long as it has existed.
BULLThe cycle. It is longer this time because the bottleneck moved. Customers are planning multi-year build-outs and cannot take tools faster than clean rooms and power allow, which stretches the upswing. Management itself calls its 2030 plan very conservative.
BEARStretching the upswing is not removing the downturn. And look at what is not growing: gross margin is stuck at 62.5% on memory costs, China is a third of the quarter and heading to the low 20s, and inventory rose 12% in three months.
BULLThe mix. China falling as a share is the rest of the world growing faster, not China collapsing. The margin is held down by an input-cost spike KLA did not price for, and it reprices on new products. Process-control intensity is rising in DRAM and packaging, and that is structural.
BEARThen pay for it at a fair price. The base case already grants the company’s own growth model for three years beyond 2030, and it is worth $129.99. The price is $166.95. You need 15% growth into the late 2030s, or an 8.6% discount rate with the 10-year Treasury at 5%.
BULLValuation. At 23 times next year’s earnings for the best franchise in equipment, against peers at 36–42 times trailing earnings, that is not an extreme multiple. The bull case is $172.43.
BEARAnd the bear case is $69.50, with as much weight. The asymmetry the price used to offer has gone.
On the business and the next year, the bull has the better of it. The quarter, the guide, the backlog and the easing supply constraint are facts, and they point to a strong 2027. On the cycle, the bear has the better of it. Margins, market size and the multiple are all near highs at once, and the company’s own data show working capital and memory costs absorbing part of the upturn. On the price, the bear edges it. A base case that already credits the company’s long-run growth model is worth $129.99, and the price is just above even the top of our band, which assumes a 9.0% discount rate and 3.5% terminal growth. A buyer at $166.95 is paying more than a full price for a very good business. What is uncertain: the length of the AI-driven equipment cycle; when memory costs ease; how fast China falls; whether clean-room and power constraints defer revenue or destroy it. Data to verify next, in order: the September backlog in the Form 10-Q; TSMC’s 2027 capital-spending plan; the January calendar-2027 outlook; gross margin through the first half of 2027; China’s share of the December quarter.
Making a computer chip takes hundreds of steps, and a speck of dust or a line drawn slightly wrong at any one of them can ruin it. KLA makes the machines that check the work between the steps, photographing silicon wafers at extreme magnification and measuring them to find mistakes before they become expensive. Other companies build the machines that make the chip; KLA builds the ones that inspect it.
Two ways. It sells inspection machines when chipmakers build new factories or move to new technology, which happens in waves. And it services the machines it has already sold, which brings in about $850 million every three months and has grown every year for well over a decade.
The chips used for artificial intelligence are bigger, more complicated and more valuable, so checking them matters more. Chipmakers are building new factories as fast as they can, and KLA expects its industry’s spending to pass $200 billion next year.
Very profitable: it kept about 37 cents of every dollar of sales as profit last quarter. Sales grew 29% in a year. It owes about $6 billion but holds almost $5 billion in cash, which is comfortable for a company making more than $5 billion a year.
Chip equipment has always gone through booms and slowdowns, and this one is near a high. The share price is set less by this year’s profits than by how long the boom lasts.
We think the shares are worth about $130, within a range of about $109 to $162. The price is about $167, just above the top of that range, so on our numbers the shares are a little expensive. That price assumes KLA keeps growing quickly for many years. The shares move a lot: they fell by about half between June and October.
Right: the building boom lasts longer than usual, memory chips get cheaper so KLA’s profit margins rise, and the company keeps growing at more than 10% a year well into the 2030s. Wrong: a slowdown in chip-factory spending; China, about a third of recent sales, shrinking faster because of US export rules; and a few very large customers deciding much of the demand.
| Status | What it covers |
|---|---|
| Verified from KLA filings and releases | Revenue by segment, product and region, margins, operating income, earnings per share, cash flow, capital spending, buybacks and dividends, inventories and purchase commitments, cash, marketable securities and senior notes, the share count, backlog at 30 June, customer concentration, the December-quarter guidance, the Pillar Two charge and insider transactions (Forms 4) |
| Verified from market data and peer filings | KLA at $166.95, the last Nasdaq trade at 9:51 a.m. Eastern on 29 October 2026; Applied Materials, Lam Research and ASML at their 28 October 2026 closes, with share counts, debt, cash and results from their latest filings; the euro rate; the 10-year Treasury yield from the US Treasury daily par yield curve |
| Third-party, attributed | Call remarks and analysts’ questions from a published transcript of the 28 October 2026 call (TradingKey); consensus revenue and EPS (Yahoo Finance, Investing.com); the Investor Day 2030 target model as reported (TIKR); SOXX aggregate multiples (Sonde) |
| Our estimate or judgement | The March and June quarters of fiscal 2027; the revenue and margin paths in every scenario; capital spending and depreciation after the guided range; the working-capital rate; the scenario weights; the moat, flag and management scores |
| Still open | Backlog and the share count at 30 September (Form 10-Q); the calendar-2027 outlook; when gross margin returns to 63–64%; how fast China falls as a share; whether the Pillar Two safe harbour is adopted |
Method. Unlevered discounted cash flow on a ten-year explicit path of fiscal years, methodology version 1.3. The rest of fiscal 2027 is a stub to 30 June 2027 and each later year is discounted at its mid-point; the Gordon terminal value at 3.0% is discounted from the end of fiscal 2037; everything is valued at 29 October 2026 from the 30 September 2026 balance sheet. One discount rate (10.0%) and one terminal growth rate are used across all scenarios, and each material risk is priced once. Operating income is KLA’s non-GAAP measure, which excludes only acquisition amortisation and keeps stock-based compensation as a cost, so unvested awards are not added to the share count; depreciation excludes amortisation. The senior notes are debt at face. Scenario weights are our judgement, the fair-value band is the corners of the WACC 9–11% by terminal growth 2.5–3.5% grid, and the reverse valuation is run against the market price. The rating returns to fairly valued if the price falls to $162.29 or below with no change in the evidence, and changes to undervalued below $108.91; the conclusion is most sensitive to revenue growth after fiscal 2030, the long-run operating margin and the discount rate. Ratings are undervalued, fairly valued or overvalued according to where the price sits relative to the band; Sonde does not issue buy, sell or hold recommendations or price targets. The reference price used throughout is $166.95, the last Nasdaq trade at 9:51 a.m. Eastern on 29 October 2026, and every multiple in this report scales directly with it. Ratings are reviewed each quarter on results and immediately on a material contract, a financing event or a share-price move of more than 25%.