Should You Reconsider KLA After an 82% Rally and Analyst Upgrades in 2025?

• If you have ever wondered whether KLA's rapid rise is justified and if there is still value to be found at these levels, you are not alone.
• KLA's stock price has delivered explosive returns in 2024, up 82.1% year-to-date and 80.7% over the last year. Recent weeks have seen a healthy pullback of 6.2% in the last month.
• Investors have been buzzing about KLA after a flurry of analyst upgrades and increased attention on semiconductor stocks, thanks to growing demand in AI and advanced manufacturing. New partnerships and expanding customer relationships have also helped push the stock into the spotlight, driving both optimism and some caution among the investing crowd.
• KLA currently scores a 1 out of 6 on our undervaluation checks, suggesting there are key factors still worth scrutinizing. Let’s explore the traditional valuation methods and stick around for a fresh perspective that could change how you assess the stock’s true worth.

KLA scores just 1/6 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 value by forecasting its future cash flows and discounting them back to today's value. This approach aims to capture what the business is worth based on its ability to generate cash over time, rather than relying just on current earnings or book value.

For KLA, analysts estimate the company's current Free Cash Flow at $3.88 Billion, and project it to grow to $6.83 Billion by 2030. Over the next five years, forecasts show steady annual increases in Free Cash Flow, driven partly by ongoing demand in the semiconductor sector. Beyond 2028, additional years are extrapolated to provide investors with a longer-term look at the company’s earning potential.

Based on these cash flow projections and discounting them to present value, the DCF model calculates KLA’s intrinsic value at $655.81 per share. Compared to KLA’s current share price, this suggests the stock is about 76.7% overvalued by this measure.

The takeaway is that even with optimistic growth, KLA’s share price currently exceeds its DCF-based fair value, suggesting investors should tread carefully at these levels.

Result: OVERVALUED

Our Discounted Cash Flow (DCF) analysis suggests KLA may be overvalued by 76.7%. Discover 923 undervalued stocks or create your own screener to find better value opportunities.

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

Approach 2: KLA Price vs Earnings

The Price-to-Earnings (PE) ratio is a widely used metric for valuing profitable companies like KLA. It tells investors how much they are paying for each dollar of earnings. This makes it an effective way to compare value among mature, profit-generating businesses.

Growth expectations and perceived risk play a big role in what counts as a "normal" or "fair" PE ratio. Companies expected to post stronger future earnings or with stable, low-risk profiles often command higher PE multiples. In contrast, slower growth or higher risk tends to lower the desirable PE.

KLA currently trades on a PE ratio of 35.9x. This is just below the Semiconductor industry average of 35.8x and slightly under the peer group average of 36.5x. However, simply comparing to peers or the industry can overlook important factors unique to KLA, such as its specific earnings outlook, risk profile, market cap, and profitability.

This is where Simply Wall St’s “Fair Ratio” comes in. This proprietary metric reflects the PE multiple you would expect given a company’s growth, profits, industry, and risk characteristics. For KLA, the Fair Ratio is calculated to be 33.1x. This is a bit lower than KLA’s current PE, indicating the stock might be slightly overvalued relative to what would be considered fair based on its circumstances.

Since the difference between KLA's current PE and its Fair Ratio is greater than 0.10, it suggests the stock is somewhat expensive at these levels.

Result: OVERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1437 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's introduce you to Narratives. A Narrative is a concise story that expresses your perspective on a company, connecting what you believe about its future (like revenue, earnings, and margins) to a financial forecast and ultimately a fair value estimate.

With Narratives, you are no longer just looking at static numbers. You are expressing your reasoning and assumptions directly and seeing how they translate to a share price. Narratives make it easy for anyone, regardless of experience level, to test their ideas and understand what needs to happen for a stock to be a "good" buy or sell.

Available on Simply Wall St's Community page and used by millions of investors, Narratives let you compare your view side-by-side with others and see how your assumptions stack up. They also update dynamically whenever new information, such as news or earnings, comes out, so your valuation always reflects the latest facts.

For example, for KLA, some investors with bullish outlooks for the AI and DRAM markets have Narratives that estimate a fair value as high as $1,075, while more cautious perspectives place it closer to $745. This enables you to see exactly what drives those differences and decide which outlook you agree with.

Do you think there's more to the story for KLA? Head over to our Community to see what others are saying!

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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