Is KLA’s Rally Justified as Nvidia Supply Deal Lifts Semiconductor Sentiment?

If you have been eyeing KLA stock lately, you are in good company. Watching the recent numbers flash by can make any investor pause to ask what is next, and whether now is the right entry point. KLA has had a strong run over the past few years, boasting an impressive 340% total return over five years and nearly 150% across three years. More recently, though, the price action has been a little choppier. The past quarter saw gains of roughly 12%, but the last month and week have both registered small declines. This suggests some investors may be pausing to reassess risk as market conditions shift and new tech news influences sentiment.

This pattern is not unusual for a company in the semiconductor sector, where momentum and growth expectations can change quickly. Still, KLA continues to grow revenue at 6.5% and net income at over 8% annually, underlining a solid fundamental story. With shares now trading at around $876, the market is only about 6% below the consensus analyst price target. This may have some investors wondering if most of the upside is already priced in, or if there is still room for growth.

To get a clearer sense of value, we will break down KLA's standing through several popular valuation approaches. On our composite value score, KLA scored 2 out of 6, meaning it is currently undervalued by only two of the six main checks we use. But are these models telling the whole story? Stay tuned, as we will also look at a smarter, more comprehensive way to understand if KLA is trading at a true discount.

KLA delivered 9.0% returns over the last year. See how this stacks up to the rest of the Semiconductor industry.

Approach 1: KLA Cash Flows

The Discounted Cash Flow (DCF) model estimates a company's true worth by forecasting its future free cash flows and discounting them back to today’s value. This approach helps investors gauge whether a stock’s price reflects its long-term potential or is influenced by short-term sentiment.

For KLA, the latest twelve months Free Cash Flow stands at $3.7 billion. Analysts expect this figure to increase steadily each year, reaching roughly $5.9 billion by 2030. These projections indicate confidence in KLA's continued growth trajectory, although the pace moderates over time.

Using a two-stage DCF model, the estimated intrinsic fair value of KLA shares is $562.39. With the current share price around $876, the model suggests KLA is 55.8% overvalued. In other words, the stock trades significantly above its estimated intrinsic worth.

This substantial gap suggests that, at least by the numbers, KLA’s current valuation is running well ahead of its long-term fundamentals.

Result: OVERVALUED

Our DCF analysis suggests KLA may be overvalued by 55.8%. Find undervalued stocks based on DCF analysis or create your own screener to find better value opportunities.

Approach 2: KLA Price vs Earnings

The Price-to-Earnings (PE) ratio is a classic tool for valuing established, profitable companies like KLA. Because it ties a company's share price directly to its actual earnings, it is especially useful for businesses with a consistent profit track record.

Growth expectations and risk levels often dictate what qualifies as a “normal” PE ratio for a stock. Higher growth prospects and stability can justify a higher PE, while greater risk or slowing growth generally lead to a lower PE.

Currently, KLA trades at a PE ratio of 28.5x. This is similar to the broader semiconductor industry average, which also stands at 28.5x, and is slightly below the average of its peers at 30.4x. These benchmarks provide valuable context for how the market views KLA relative to others in the sector.

Simply Wall St’s proprietary “Fair Ratio” considers earnings growth, profit margins, industry dynamics, and risk. For KLA, the Fair Ratio is calculated at 28.2x, closely matching its actual PE. This suggests the current market pricing is balanced and reflects KLA's earnings potential and position in the industry.

Result: ABOUT RIGHT

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

While valuation models like PE ratios offer useful benchmarks, a more powerful way to invest is by using Narratives: your personal story and logic behind a company’s numbers and future potential.

A Narrative combines your perspective on where KLA is headed with your assumptions for revenue, earnings, and profit margins, linking the company’s story to a financial forecast and, ultimately, a fair value.

This makes Narratives a simple, accessible tool for any investor, especially within the Simply Wall St platform, which connects you to a community of millions refining their own perspectives in real time.

With a Narrative, you can easily compare your Fair Value to today’s share price to decide if now is the right time to buy or sell. Your Narrative automatically updates as new information, such as earnings or industry news, emerges.

For example, one KLA Narrative highlights rapid AI and advanced packaging adoption unlocking future value and justifying a price as high as $1,075. Another focuses on risks from tariffs and cyclical markets, leading to a fair value near $745.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com