How Should Investors View KLA’s Rally After AI Chip Demand Pushes Shares Higher?

Thinking about what to do with KLA stock these days? You are not alone. With the share price recently closing at $1,071.25 and an impressive streak of gains, the company has been catching a lot of attention from investors trying to figure out if there is more room to grow or if the market has already priced in all the good news. Over just the past week, KLA has jumped 8.3%, and over the last year the stock is up a remarkable 42.1%. If you zoom out even more, you will see a staggering 264.1% return over the past three years and an eye-popping 486.3% gain over five years. That kind of performance does not go unnoticed.

What is driving these moves? Part of the story is the broader excitement around semiconductors and their essential role in powering everything from AI to automotive innovation. Recent market optimism is amplifying growth potential, as investors seem more comfortable with the risks and are eager to participate in the next wave of chip advances. Of course, with all this momentum, the big question is whether the valuation still looks attractive or if it is getting stretched.

Right now, by the numbers, KLA scores a 2 out of 6 for undervalued checks, indicating that by some traditional measures, there may only be a couple of valuation indicators still flashing green. So how does the stock really stack up? Let us take a closer look at the major valuation approaches one by one, and at the end I will share an even sharper lens for understanding KLA's true value in today's market.

KLA scores just 2/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: KLA Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model estimates a company's intrinsic value by projecting its future free cash flows and then discounting those amounts back to today's dollars. This method helps investors see what a company is truly worth based on its ability to generate cash in the future, not just current market hype.

For KLA, the latest reported Free Cash Flow over the last twelve months stands at approximately $3.7 billion. Analyst forecasts cover the next five years, with further projections extending out ten years in total, showing steady growth. By 2030, KLA's free cash flow is estimated to reach nearly $5.9 billion according to these projections. It is worth noting that while analysts provide the numbers for the near term, Simply Wall St extrapolates figures for the later years, so these are inherently less certain.

Based on these cash flow projections and using the DCF model, KLA’s estimated intrinsic value per share comes in at $576.78. With the current share price at $1,071.25, the market is valuing KLA at about 85.7% above this fair value estimate. This signals a significant premium and suggests the stock is currently overvalued according to this approach.

Result: OVERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for KLA.

Our Discounted Cash Flow (DCF) analysis suggests KLA may be overvalued by 85.7%. Find undervalued stocks or create your own screener to find better value opportunities.

Approach 2: KLA Price vs Earnings

The Price-to-Earnings (PE) ratio is a widely used valuation metric for profitable companies like KLA because it quickly relates the market value of a company to its actual earnings power. For established, consistently profitable businesses, the PE ratio offers investors a clear view of how much they are paying for each dollar of current earnings, which is a fundamental consideration in stock pricing.

What makes a “normal” or “fair” PE ratio for a company? It often depends on expectations for future earnings growth, as well as the risks investors see in the business. Higher growth prospects or lower risks typically justify a higher PE. Slower growth or higher risks push fair multiples down.

KLA currently trades at a PE ratio of 34.8x. This is just below the semiconductor industry average of 34.9x and slightly lower than the average PE for KLA's peers, which stands at 37.4x. However, Simply Wall St also calculates a custom “Fair Ratio” for each company. For KLA, this is 28.5x. This Fair Ratio reflects not only the company’s expected growth, market cap, and risk profile, but also its industry positioning and profit margins. Unlike simple comparisons to industry or peer averages, the Fair Ratio offers a more nuanced benchmark that better matches the company’s unique prospects and risk factors.

Comparing KLA’s actual PE ratio of 34.8x to its Fair Ratio of 28.5x suggests the market is pricing in significant optimism for future growth, more so than Simply Wall St’s analysis supports. This implies the stock is trading above what would be considered fair value on earnings alone.

Result: OVERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your KLA Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives. A Narrative is a simplified, powerful way for you to connect your own understanding of a company's story to its financial forecasts and then to a fair value estimate. Instead of relying solely on raw numbers or analyst targets, you capture your perspective, for example, your assumptions about KLA's future revenue, margins, and market trends, and see how these beliefs drive what you think the company is worth.

Narratives act as a bridge between your outlook for the business and a dynamic, forward-looking fair value, helping you clearly compare that to the current share price and decide if it’s time to buy, sell, or hold. This tool is easy to use and is available, free, on Simply Wall St’s Community page, alongside insights from millions of other investors. As new information such as news or earnings comes in, Narratives update automatically, so your valuation always reflects the latest facts, not just static formulas.

For example, some investors see huge upside for KLA, with the highest analyst price target at $1,075, banking on AI-driven demand and growing margins, while others are much more cautious, with the lowest fair value call at $745, pointing to risks like tariffs and market cyclicality. Your Narrative lets you make your own call and track how your view matches reality over time.

Do you think there's more to the story for KLA? Create your own Narrative to let the Community know!

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.

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