Earnings Not Telling The Story For KLA Corporation (NASDAQ:KLAC)

With a price-to-earnings (or "P/E") ratio of 25.5x KLA Corporation (NASDAQ:KLAC) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, KLA has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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How Is KLA's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as KLA's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. However, a few strong years before that means that it was still able to grow EPS by an impressive 175% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 14% per year as estimated by the analysts watching the company. That's shaping up to be similar to the 13% each year growth forecast for the broader market.

With this information, we find it interesting that KLA is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that KLA currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware KLA is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on KLA, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.