AI, IoT, And EV Trends Will Redefine Advanced Packaging

Key Takeaways

• KLA is positioned to benefit from rising AI chip complexity and advanced packaging, driving higher margins and recurring software revenue through greater process control intensity.
  
• Global semiconductor supply chain shifts and government investments support multi-year growth and stability in KLA's core business, with expanding opportunities in e-beam applications.
  
• Heavy exposure to trade restrictions, customer concentration, technological disruption, and lack of diversification heightens KLA's vulnerability to volatile earnings and slower long-term growth.

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.

• Analyst consensus assumes advanced packaging revenue exceeding $850 million in 2025, but this outlook may modestly understate KLA's potential as management and customers signal growing traction beyond CoWoS into high-bandwidth memory and hybrid bonding, positioning advanced packaging to potentially far exceed $1 billion annually and materially elevate both revenue and gross margin as high-value AI chip architectures rapidly proliferate.
  
• Analysts broadly agree KLA's dominant share in process control and recent strength in e-beam inspection are tailwinds, but the continued doubling of e-beam revenue and customer demand outpacing capacity indicate KLA may accelerate share gains in newly addressable e-beam applications, leading to step-function improvements in both total addressable market and margin profile as inspection intensity climbs for sub-5nm and 3D architectures.
  
• The accelerating global push for semiconductor supply chain independence and government-funded fab reshoring presents a years-long, underappreciated investment cycle in local, leading-edge capacity that should drive stable multi-year growth in KLA's core business and services, enabling sustained revenue outperformance and resilient long-term earnings growth regardless of macro volatility.
  
• KLA's integration of advanced AI-driven analytics and software content into process control tools-coupled with a high rate of design starts for AI, automotive, and HPC-supports secular growth in high-margin, recurring software and services revenue, supporting even higher net margins and predictable free cash flow as customers scale next-generation production.
  
• Rising process complexity and the shift to high-mix, high-volume manufacturing for AI and HPC workloads fundamentally raises minimum process control intensity not just in R&D but throughout HVM, meaning KLA enjoys a structurally higher attach rate, growing dollar content per fab, and expanding margin leverage as chipmakers race to enable yield at the smallest nodes and most advanced packaging.

KLA Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on KLA compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming KLA's revenue will grow by 7.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 32.0% today to 34.6% in 3 years time.
• The bullish analysts expect earnings to reach $5.0 billion (and earnings per share of $40.23) by about July 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 price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 35.4x on those 2028 earnings, up from 33.5x today. This future PE is greater than the current PE for the US Semiconductor industry at 31.1x.
• Analysts expect the number of shares outstanding to decline by 1.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.64%, as per the Simply Wall St company report.

KLA Future Earnings Per Share Growth

Risks

• Increasing geopolitical trade restrictions, export controls, and new tariff regimes-especially involving the U.S. and China-are already creating revenue headwinds and service access limitations, with KLA management forecasting at least a $500 million annual sales impact and stating that tariff headwinds will reduce gross margins by about 100 basis points per quarter, threatening both long-term revenue and net profit growth.
  
• KLA's strong customer concentration and reliance on a handful of leading-edge semiconductor manufacturers means that vendor pricing power and market share can rapidly shift if those customers alter investment cycles, negotiate more aggressively, or lose competitiveness, raising the risk of unpredictable revenue and margin swings in the long run.
  
• The rapid emergence of new semiconductor manufacturing techniques such as advanced packaging, alternative architectures (chiplets, hybrid bonding), and potential displacement by more nimble or differentiated competitors puts ongoing pressure on KLA to accelerate R&D; failure to adequately adapt could erode core product relevance, demand, and ultimately net margins.
  
• KLA's underdiversification outside its core inspection and metrology business makes it especially vulnerable to sector cyclicality-such as prolonged downturns in Wafer Fab Equipment (WFE) spending or persistent slowdowns in end markets like smartphones and PCs-potentially leading to longer intervals of flat or declining revenue and increased earnings volatility.
  
• Environmental, social, and governance (ESG) pressures as well as looming global climate and manufacturing regulations could raise operating costs for both KLA and its customers over time; this could squeeze margins and shift production or demand toward regions with lighter regulations, ultimately risking slower revenue growth and compressed profitability.

Valuation

• The assumed bullish price target for KLA is $1067.6, which represents two standard deviations above the consensus price target of $830.45. This valuation is based on what can be assumed as the expectations of KLA's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $1075.0, and the most bearish reporting a price target of just $590.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $14.4 billion, earnings will come to $5.0 billion, and it would be trading on a PE ratio of 35.4x, assuming you use a discount rate of 9.6%.
• Given the current share price of $936.53, the bullish analyst price target of $1067.6 is 12.3% 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.