KLA Corporation (KLAC)

Semiconductor manufacturing equipment maker KLA Corporation (NASDAQ:KLAC) reported revenue ahead of Wall Streets expectations in Q3 CY2025, with sales up 13% year on year to $3.21 billion. Guidance for next quarter’s revenue was better than expected at $3.23 billion at the midpoint, 1.4% above analysts’ estimates. Its non-GAAP profit of $8.81 per share was 2.2% above analysts’ consensus estimates.

Company Overview

Formed by the 1997 merger of the two leading semiconductor yield management companies, KLA Corporation (NASDAQ:KLAC) is the leading supplier of equipment used to measure and inspect semiconductor chips.

KLAC's primary peers and competitors are Applied Materials (NASDAQ:AMAT), ASML (NASDAQ:ASML) Lam Research (NASDA:LCRX), and Tokyo Electron (TSE:8035).

The semiconductor capital (manufacturing) equipment group has become highly concentrated over the past decade. Suppliers have consolidated, and the increasing cost of innovation have made it unaffordable to almost everybody, except the largest companies, to produce leading edge chips. The result of the increased industry concentration has been higher operating margins and free cash generation through the cycle. Despite this structural improvement, the businesses can still be quite volatile, as demand fluctuations for the semiconductor equipment are magnified by the already cyclical nature of underlying semiconductor demand. Read More. Chip manufacturing is done in "batches" on a single round silicon disk, known as a "wafer". Multiple chips can be fabricated on a single wafer, which itself can cost over $10,000 today for the more advanced nodes. The actual chip fabrication process requires hundreds to thousands of steps that are executed at an atomic scale. From start to finish, including fabrication, testing and packaging, it can take 3 months to make a chip. The process to create a silicon wafer starts with sand, which is melted to extract silicon, then purified and formed into a cylinder, which is then sliced down into discs about 1mm thick that are then polished into wafers. Next, the wafers go to a semiconductor foundry and go through a process where successive layers of insulating, conducting, and semiconducting materials are stacked on top of one another to form many small complex interconnected 3D structures (wires, insulators, etc), with each layer consisting of 15-20 processes such as deposition, lithography, etching, stripping, testing, and cleaning.

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Thankfully, KLA Corporation’s 16.1% annualized revenue growth over the last five years was excellent. Its growth surpassed the average semiconductor company and shows its offerings resonate with customers, a great starting point for our analysis. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Long-term growth is the most important, but short-term results matter for semiconductors because the rapid pace of technological innovation (Moore's Law) could make yesterday's hit product obsolete today. KLA Corporation’s annualized revenue growth of 11% over the last two years is below its five-year trend, but we still think the results suggest healthy demand.

This quarter, KLA Corporation reported year-on-year revenue growth of 13%, and its $3.21 billion of revenue exceeded Wall Street’s estimates by 1.1%. Beyond the beat, this marks 6 straight quarters of growth, showing that the current upcycle has had a good run - a typical upcycle usually lasts 8-10 quarters. Company management is currently guiding for a 4.8% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 5.4% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and suggests its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business’ capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, KLA Corporation’s DIO came in at 241, which is 12 days above its five-year average. These numbers suggest that despite the recent decrease, the company’s inventory levels are higher than what we’ve seen in the past.

Gross profit margin is a key metric to track because it shows how much money a semiconductor company gets to keep after paying for its raw materials, manufacturing, and other input costs.

KLA Corporation’s gross margin is one of the best in the semiconductor sector, and its differentiated products give it strong pricing power. As you can see below, it averaged an elite 60.6% gross margin over the last two years. Said differently, roughly $60.60 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

In Q3, KLA Corporation produced a 61.3% gross profit margin, marking a 1.7 percentage point increase from 59.6% in the same quarter last year. KLA Corporation’s full-year margin has also been trending up over the past 12 months, increasing by 1.5 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

KLA Corporation has been a well-oiled machine over the last two years. It demonstrated elite profitability for a semiconductor business, boasting an average operating margin of 37.8%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, KLA Corporation’s operating margin rose by 3 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q3, KLA Corporation generated an operating margin profit margin of 43%, up 3.6 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

KLA Corporation’s EPS grew at a remarkable 26.2% compounded annual growth rate over the last five years, higher than its 16.1% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into KLA Corporation’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, KLA Corporation’s operating margin expanded by 3 percentage points over the last five years. On top of that, its share count shrank by 15.4%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

In Q3, KLA Corporation reported adjusted EPS of $8.81, up from $7.33 in the same quarter last year. This print beat analysts’ estimates by 2.2%. Over the next 12 months, Wall Street expects KLA Corporation’s full-year EPS of $34.80 to grow 3.4%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

KLA Corporation has shown terrific cash profitability, and if sustainable, puts it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the semiconductor sector, averaging an eye-popping 30.8% over the last two years.

Taking a step back, we can see that KLA Corporation’s margin was unchanged over the last five years, showing its long-term free cash flow profile is stable.

KLA Corporation’s free cash flow clocked in at $1.07 billion in Q3, equivalent to a 33.2% margin. This cash profitability was in line with the comparable period last year and above its two-year average.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

KLA Corporation’s five-year average ROIC was 61.4%, placing it among the best semiconductor companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

KLA Corporation reported $4.68 billion of cash and $5.89 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $5.88 billion of EBITDA over the last 12 months, we view KLA Corporation’s 0.2× net-debt-to-EBITDA ratio as safe. We also see its $31.36 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see KLA Corporation beat analysts’ EPS expectations this quarter. We were also glad its revenue guidance for next quarter slightly exceeded Wall Street’s estimates. Overall, this print had some key positives. The stock remained flat at $1,226 immediately after reporting.

Updated: December 4, 2025 at 9:26 PM EST

When considering an investment in KLA Corporation, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

There is a lot to like about KLA Corporation. First of all, the company’s revenue growth was impressive over the last five years. And while its projected EPS for the next year is lacking, its admirable gross margins indicate robust pricing power. On top of that, KLA Corporation’s powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits.

KLA Corporation’s P/E ratio based on the next 12 months is 32.7x. Scanning the semiconductor space today, KLA Corporation’s fundamentals really stand out, and we like it at this price.

Wall Street analysts have a consensus one-year price target of $1,290 on the company (compared to the current share price of $1,209), implying they see 6.7% upside in buying KLA Corporation in the short term.