Advanced Packaging And AI Tools Will Expand Future Markets

Key Takeaways

• Strong demand for AI infrastructure and e-beam technologies, along with service contract growth, are key drivers of KLA's revenue and margin enhancement.
  
• Effective tariff mitigation strategies support stable margins, while expanding market share in process control bolsters long-term profitability.
  
• Geopolitical and trade uncertainties threaten KLA's revenue and earnings stability, with potential impacts from U.S. export controls and macroeconomic tensions affecting growth and investor confidence.

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's strong position in advanced packaging, driven by the increasing demand for AI infrastructure, is expected to boost revenue, with expectations to exceed $850 million in calendar 2025, impacting revenue growth positively.
  
• The company's ability to maintain and expand its market share in process control, particularly in wafer-level packaging, positions it to benefit from high-value AI-driven wafer volumes, which should enhance revenue and net margins.
  
• KLA's investment in e-beam technologies is gaining traction, with demand expected to increase due to its performance in concert with optical inspection tools. This dual tool strategy can lead to better earnings by reaching underserved market segments.
  
• Despite potential global tariff headwinds, KLA's operational strategies to mitigate these through pricing adjustments and process optimizations are anticipated to protect gross margins and sustain profitability.
  
• The ongoing expansion of service contracts, with a history of 52 consecutive quarters of growth, underscores a highly predictable revenue stream, expected to continue contributing to stable cash flows and leverage optimal capital returns initiatives, impacting free cash flow and EPS favorably.

KLA Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming KLA's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 32.0% today to 35.1% in 3 years time.
• Analysts expect earnings to reach $4.9 billion (and earnings per share of $38.23) by about May 2028, up from $3.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.2x on those 2028 earnings, up from 24.3x today. This future PE is greater than the current PE for the US Semiconductor industry at 22.5x.
• Analysts expect the number of shares outstanding to decline by 1.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.33%, as per the Simply Wall St company report.

KLA Future Earnings Per Share Growth

Risks

• Global trade and tariff uncertainties pose a considerable risk, potentially impacting KLA's gross margin with projected 100 basis point headwinds per quarter due to tariffs, challenging earnings stability.
  
• Newly announced U.S. government export controls have already impacted service revenue growth by constraining operations, resulting in potential revenue ramifications and weakened net margins within key regions like China.
  
• Macro uncertainties and ongoing geopolitical tensions, including potential second-order effects, can destabilize customer investment plans globally, which may result in inconsistent revenue growth.
  
• The postponement of KLA's Investor Day highlights significant uncertainty about future trade scenarios and macroeconomic conditions, potentially affecting investor confidence and projected revenue streams.
  
• The company's reliance on contract-based service revenues, particularly in China, makes it vulnerable to economic policies and trade restrictions, which could disrupt revenue predictability and margins.

Valuation

• The analysts have a consensus price target of $786.435 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 $900.0, and the most bearish reporting a price target of just $590.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $14.0 billion, earnings will come to $4.9 billion, and it would be trading on a PE ratio of 26.2x, assuming you use a discount rate of 9.3%.
  
• Given the current share price of $679.42, the analyst price target of $786.44 is 13.6% 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.