Why KLA Corporation Stock Looks Like A Buy At $310 – Forbes
BRAZIL – 2020/06/16: In this photo illustration the KLA-Tencor Corporation logo seen displayed on a … [+]
KLA Corporation (NASDAQ: KLAC), a company that sells manufacturing tools and yield management systems for the semiconductor industry, has seen its stock price rise by about 3.5x since the end of 2018 trading at levels of close to $311 per share, outperforming the broader Nasdaq-100 which was also up by a healthy 2.3x over the same period. The gains come on the back of robust demand growth for the company’s wafer inspection products and services operations as well as the current chip supply crunch, which should translate into stronger demand for the company’s products and services. While the stock is also up by about 19% year-to-date, it has underperformed most of its peers in the semiconductor manufacturing equipment space. For example, Applied Materials is up by about 60% this year, while ASML is up 43% and LAM Research is up about 32%. So is the stock a buy at current levels? We think it is for a couple of reasons. Our dashboard What Factors Drove 3.5x Change In KLA Corporation Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.
What Has Driven KLA Corporation’s Stock?
So what has driven KLA’s stock price appreciation over the last three years? Revenues rose from $4 billion in FY’18 (fiscal years end June 30) to about $5.8 billion in FY’20, an increase of about 45%. The growth was driven primarily by strong demand growth for the company’s Semiconductor Process Control segment, which provides a portfolio of inspection, measurement, and data analytics products, and related services that enable logic chip manufacturers to achieve their targeted yield rates through the semiconductor fabrication process. Net margins grew from about 20% in 2018 to about 21% in FY’20, driven by improving scale and increasingly differentiated products. Net income grew from around $0.8 billion in FY’18 to about $1.2 billion in FY’20. EPS grew at a slightly quicker pace, from around $5.13 per share in FY’18 to $7.76 in FY’20, as the company’s shares outstanding declined, on account of stock repurchases. The strong growth rates and improving margins have meant that investors are valuing KLA stock more richly, with its P/E multiple, based on GAAP earnings, expanding from 17x in FY’18 to almost 40x currently, based on FY’20 earnings.
Stock Prices
What’s the longer-term outlook for the stock?
The longer-term demand outlook looks promising for the company for a couple of reasons. Firstly, the ongoing semiconductor shortage, increasing digitization, and the increasing push by countries, particularly the U.S., to bolster domestic production, are likely to drive a multi-year capex cycle in the semiconductor industry. For example, Taiwan’s TSMC said it will spend about $100 billion over the next three years to boost capacity, while Samsung Electronics plans to invest $116 billion into boosting production by 2030. Even microprocessor behemoth Intel is looking to double down on the foundry space, producing chips for other companies. These trends are likely to directly help KLA. Moreover, KLA’s tools, which essentially help semiconductor manufacturers yield defect-free chips, are likely to become more crucial to chip companies as they move to more challenging fabrication processes, packing in more transistors per chip to boost processing power and cut energy consumption. KLA’s revenues are projected to grow by 18% per consensus estimates in FY’21, while rising by another 14% in FY’22. The stock also isn’t too expensive relative to this growth, trading at just about 18x FY’22 adjusted earnings.
See our theme on Stocks That Benefit From The Semiconductor Shortage for a complete list of companies that stand to benefit from the current supply crunch in the semiconductor space.
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