Published on August 27th, 2020 📆 | 3412 Views ⚑0
KLA Corporation: A Technology Leader With Growth Potential (NASDAQ:KLAC)
KLA Corporation’s (KLAC) stock is rising strongly over the past five months. The company is fairly valued compared to its competitors. I believe the stock’s upside is limited from here in the near term and I expect the stock to stay in a range in the near term. However, in the long term, the stock has significant upside left. The company has a few strong growth drivers which will drive the stock higher in the long term. Long-term investors can buy the stock during significant pullbacks.
KLA is a player in the PDC (process diagnostics and control) tools market. It offers process control and process-enabling solutions for industries such as semiconductors, PCBs (printed circuit boards) and displays. The company offers solutions for manufacturing and testing of wafers and reticles, ICs (integrated circuits), LEDs (light-emitting diodes), and flat panel displays. The company’s comprehensive portfolio of inspection, metrology and data analytics products helps IC manufacturers achieve target yields.Source: Needpix.com
Reticle Inspection Systems
For achieving high semiconductor device yields, error-free reticles (also known as photomasks or masks) are needed. This is because reticle defects can increase in every die on production wafers. Reticles are manufactured based on mask blanks. KLA’s reticle inspection systems help fabs identify defects on reticles at an early stage so that corrective measures can be taken.
With KLA’s reticle inspection systems, high semiconductor device yields can be achieved. As a result, KLA’s revenue from these products continues to grow.
KLA’s SensArray products offer its customers a portfolio of advanced wireless and wired wafers and reticles. The portfolio helps in situ monitoring of the production process environment. These wafers and reticles offer insight into critical process parameters. The SensArray Automation package offers a collection of measurement instruments for the process tool chamber.
SensArray products help customers achieve the best possible reproducibility, process optimization and uptime associated with fabrication equipment, and therefore, I believe KLA’s revenue from these products will continue to grow.
Defect Inspection and Review Systems
KLA’s wafer defect inspection and review systems offer solutions for chipmakers and substrate manufacturers. Wafer inspectors find defects in wafers and help engineers detect and monitor critical yield deviations. KLA’s defect review systems capture high-resolution images of the defects and help chipmakers and substrate manufacturers identify and resolve yield-related problems.
By implementing KLA’s defect inspection and review tools, chipmakers and substrate manufacturers can achieve significant yield improvement and better time to market. Therefore, I believe these tools have the potential to see increasing demand in the market.
Fiscal 2020 Fourth Quarter Results
For the fourth quarter of fiscal year 2020, KLA reported revenue of $1,460 million, up 16% year-over-year. GAAP net income attributable to KLA was $411 million, up 88.5% year-over-year. Non-GAAP net income attributable to KLA was $426 million, up 47.4% year-over-year. GAAP EPS was $2.63, up 94.8% year-over-year and non-GAAP EPS was $2.73, up 53.4% year-over-year.
The company reported excellent results for the fourth quarter of fiscal year 2020 amid a challenging macro environment. The results demonstrated strong demand from customers. Both the top line and bottom line of the company grew significantly during the quarter driven by the growth drivers, as mentioned above. Strong datacenter demand, demand from 5G infrastructure and the revival of PC demand acted as catalysts to deliver the result. PC demand revived driven by work from home, virtual collaboration, remote learning, and entertainment and gaming. I believe the demand environment will continue to remain strong in the next five years, which will drive KLA’s long-term growth.
The worldwide market for process control and process-enabling solutions used by semiconductor and electronics manufacturers is highly competitive. KLA’s competitors in this market include Applied Materials (AMAT), ASML Holding (ASML), Hitachi High-Technologies Corporation, Onto Innovation (ONTO), and Lasertec (OTCPK:LSRCF). KLA expects that its competitors will continue to improve their products, and introduce new products. However, KLA also develops new products and improves existing products on a continuous basis.
KLA’s competitive advantage is that it offers its customers a comprehensive portfolio of technologically-advanced PDC tools. The portfolio includes solutions for reticle inspection, wafer inspection, defect review and metrology. The company’s highly advanced products are designed to offer customers comprehensive solutions for achieving higher and stable semiconductor device yields. In addition, KLA competes with its competitors based on system performance, ease-of-use, reliability and interoperability of products with the existing installed base.
KLA’s most similar peers include Applied Materials, ASML Holding, Onto Innovation and Lam Research (LRCX). KLA’s non-GAAP forward P/E multiple is 18.20x, compared to Applied Materials’ 15.55x, ASML Holding’s 43.34x, Onto Innovation’s 19.71x and Lam Research’s 16.62x. KLA’s trailing twelve-month price to sales multiple is 5.63x, compared to Applied Materials’ 3.59x, ASML Holding’s 10.97x, Onto Innovation’s 2.96x and Lam Research’s 5.06x. KLA’s trailing twelve-month price to cash flow multiple is 18.21x, compared to Applied Materials’ 17.56x, ASML Holding’s 40.87x, Onto Innovation’s 28.61x and Lam Research’s 24.04x.
KLA is fairly valued compared to its competitors. KLA has an indebted balance sheet consisting of $1.98 billion of cash and $3.57 billion of debt. The company’s net leverage ratio is 0.75x, which is not alarming. According to a report, “The global Semiconductor Market is projected to reach USD 730.29 billion by 2026, exhibiting a CAGR of 5.2% during the forecast period.” The PDC tools market is a part of the semiconductor market, which will also grow at least at mid-single digits in the next five years. This indicates that KLA’s growth drivers will drive the company’s revenue growth at a CAGR of mid- to high-single digits in the next five years. As far as KLA’s stock is concerned, I expect that it will stay in a range in the near term, and it has significant upside left in the long term. Long-term investors can buy the stock during pullbacks to maximize their profit.
From June 2015 to June 2020, KLA’s revenue has grown at a CAGR of 15.59%, and from June 2011 to June 2015, the company’s revenue has grown at a CAGR of –2.97%. From June 2011 to June 2020, the company’s revenue has grown at a CAGR of 6.94%. I believe revenue will continue to grow at a CAGR of around 7% in the next five years. In June 2020, the company’s revenue was $5,806.4 million. At a CAGR of 7%, KLA’s June 2025 revenue will be $8,145.0 million or $52.39 per share. In the last five years, the company’s shares have traded between the price to sales multiples of 3x and 6x. Applying a price to sales multiple of 6x on the company’s June 2025 revenue per share, I get $314.34 as the company’s June 2025 share price.
To succeed in the semiconductor, flat panel display and printed circuit board industries, KLA must continue to develop new products and improve existing products. In addition, business success depends on the company’s ability to accurately predict evolving industry standards. Winning market acceptance for new products is another important factor. If the company fails to accurately predict evolving industry standards, and fails to win market acceptance for new products, its revenue growth and profitability could be negatively impacted.
KLA’s customer base in the semiconductor industry is highly concentrated and orders from a small number of customers account for a significant part of the company’s revenue. The company’s products are configured to each customer’s specifications, and cancellation of orders from a single customer could adversely affect revenue growth. In addition, if the company loses a customer, its revenue growth could be negatively impacted.
KLA delivered exceptional results in the fourth quarter of fiscal year 2020. The company’s business model has shown enduring strength and resiliency in today’s extraordinary circumstances. The business model guides the company’s strategic objectives, which drive the company’s revenue growth. KLA is a long-term growth story, and long-term investors should wait patiently for a significant pullback to buy the stock.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.