AI And Advanced Packaging Will Shape Future Opportunities In Process Control

Key Takeaways

• Increasing demand in advanced memory and packaging sectors, coupled with AI-driven growth, is set to significantly boost KLA’s revenue and margins.
  
• Stability in gross margins and gains in high-value semiconductor markets support favorable outcomes for KLA’s net margins and earnings.
  
• New U.S. export controls on Chinese sales could harm KLA's net margins due to potential revenue shortfalls and increased operational challenges.

Catalysts

Engages in the design, manufacture, and marketing of process control, process-enabling, and yield management solutions for the semiconductor and related electronics industries worldwide.

• KLA is expected to benefit from increasing demand in leading-edge logic and specific memory sectors, particularly high-bandwidth memory and advanced packaging, which can drive revenue growth.
  
• Investments in AI and high-complexity semiconductor designs are anticipated to increase the demand for KLA’s process control solutions, improving both revenue and margins as AI becomes a major growth driver.
  
• Growing demand for advanced packaging is expected to push KLA's revenue in that segment from $500 million in 2024 to over $800 million in 2025, contributing notably to revenue growth.
  
• KLA's services business has demonstrated consistent growth, with expectations for continued growth driven by increasing installed base and new product pricing, positively impacting both revenue and cash flow.
  
• The anticipated stability of gross margins at approximately 62% for 2025, combined with potential share gains in high-value semiconductor markets, suggests a likely positive impact on net margins and earnings.

KLA Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming KLA's revenue will grow by 8.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 29.6% today to 35.4% in 3 years time.
• Analysts expect earnings to reach $4.9 billion (and earnings per share of $37.15) by about March 2028, up from $3.2 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $4.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.5x on those 2028 earnings, down from 29.5x today. This future PE is lower than the current PE for the US Semiconductor industry at 30.1x.
• Analysts expect the number of shares outstanding to decline by 1.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.67%, as per the Simply Wall St company report.

KLA Future Earnings Per Share Growth

Risks

• New U.S. government export controls could significantly impact KLA’s revenue from China, which might potentially reduce their net margins if the anticipated $500 million impact is not mitigated.
  
• KLA's reliance on leading-edge node deployments for growth might expose it to risks if competitors accelerate their technology developments, potentially affecting future earnings growth.
  
• The company's growth expectations are heavily tied to AI and high-bandwidth memory investments, which means any slowdown in these areas could impact revenue growth and net margins.
  
• Execution risks related to new product development and scaling investments could lead to higher operating expenses without corresponding revenue growth, potentially affecting net margins.
  
• Potential inefficiencies and logistical challenges due to reshuffling resources because of restricted access to some Chinese fabs could impact expenses and net margins.

Valuation

• The analysts have a consensus price target of $820.975 for KLA based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $950.0, and the most bearish reporting a price target of just $655.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $13.7 billion, earnings will come to $4.9 billion, and it would be trading on a PE ratio of 27.5x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of $711.29, the analyst price target of $820.97 is 13.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.