KLA Corporation (KLAC)

Semiconductor manufacturing equipment maker KLA Corporation (NASDAQ:KLAC) beat Wall Street’s revenue expectations in Q1 CY2025, with sales up 29.8% year on year to $3.06 billion. Guidance for next quarter’s revenue was optimistic at $3.08 billion at the midpoint, 2.7% above analysts’ estimates. Its non-GAAP profit of $8.41 per share was 4% 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 performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, KLA Corporation grew its sales at an excellent 15.6% compounded annual growth rate. 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).

We at StockStory place the most emphasis on long-term growth, but within semiconductors, a half-decade historical view may miss new demand cycles or industry trends like AI. KLA Corporation’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 4.2% over the last two years was well below its five-year trend.

This quarter, KLA Corporation reported robust year-on-year revenue growth of 29.8%, and its $3.06 billion of revenue topped Wall Street estimates by 1.8%. Beyond the beat, this marks 4 straight quarters of growth, implying that KLA Corporation is in the middle of its cycle - a typical upcycle generally lasts 8-10 quarters. Company management is currently guiding for a 19.7% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 4.3% over the next 12 months, similar to its two-year rate. This projection doesn't excite us and implies its newer products and services will not lead to better top-line performance yet. 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 244, which is 19 days above its five-year average, suggesting that the company’s inventory has grown to higher levels than 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 well ahead of its semiconductor peers, and its strong pricing power is an output of its differentiated, value-add products. As you can see below, it averaged an excellent 60.1% gross margin over the last two years. Said differently, roughly $60.11 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

This quarter, KLA Corporation’s gross profit margin was 61.6%, up 3.7 percentage points year on year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

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 35.7%. 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 3.4 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q1, KLA Corporation generated an operating profit margin of 41.3%, up 10.1 percentage points year on year. The increase was solid, 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.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

KLA Corporation’s EPS grew at a remarkable 26.6% compounded annual growth rate over the last five years, higher than its 15.6% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into the nuances of KLA Corporation’s earnings can give us a better understanding of its performance. As we mentioned earlier, KLA Corporation’s operating margin expanded by 3.4 percentage points over the last five years. On top of that, its share count shrank by 15.2%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

In Q1, KLA Corporation reported EPS at $8.41, up from $5.26 in the same quarter last year. This print beat analysts’ estimates by 4%. Over the next 12 months, Wall Street expects KLA Corporation’s full-year EPS of $30.54 to grow 3.2%.

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 31.2% 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 $990 million in Q1, equivalent to a 32.3% margin. The company’s cash profitability regressed as it was 3.2 percentage points lower than in the same quarter last year, but it’s still above its two-year average. We wouldn’t put too much weight on this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends trump temporary fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

KLA Corporation’s five-year average ROIC was 57.7%, 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 $4.03 billion of cash and $5.88 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 $5.18 billion of EBITDA over the last 12 months, we view KLA Corporation’s 0.4× net-debt-to-EBITDA ratio as safe. We also see its $7.41 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.

We enjoyed seeing KLA Corporation beat analysts’ revenue, EPS, and EBITDA expectations this quarter. We were also glad its revenue and EPS guidance for next quarter exceeded Wall Street’s estimates. On the other hand, its inventory levels materially increased. Still, this quarter had some key positives. The stock remained flat at $702.69 immediately after reporting.

Updated: July 9, 2025 at 10:16 PM EDT

Before investing in or passing on KLA Corporation, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

KLA Corporation is a rock-solid business worth owning. For starters, its revenue growth was impressive over the last five years. On top of that, its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits, and its impressive operating margins show it has a highly efficient business model.

KLA Corporation’s P/E ratio based on the next 12 months is 29.3x. Looking across the spectrum of semiconductor companies today, KLA Corporation’s fundamentals shine bright. We like the stock at this price.

Wall Street analysts have a consensus one-year price target of $824.70 on the company (compared to the current share price of $923.30).