Oppenheimer analysts on Tuesday started coverage on KLA Corporation (KLAC), a key player in the semiconductor process control tools sector, with a Perform rating and a price target of $750.
The investment bank describes KLA as the industry's equivalent of "the Microsoft of metrology and inspection.” The company holds a dominant position in a market largely controlled by five companies that collectively account for 80% of total revenue.
According to Oppenheimer, KLA's importance in the semiconductor industry is underlined by its role in addressing the most pressing bottlenecks for AI compute demand, which is doubling every six months despite hardware performance only improving every two years.
This discrepancy leads to a structural shortage of advanced semiconductors and the tools required for their production. The transition to smaller nodes and advanced architectures, such as gate-all-around (GAA), has increased the demand for KLA's tools due to the need for more precise and frequent checks to maintain chip quality.
“This drives a 50% increase in critical inspection layers, and a 30% rise in high-end film metrology layers, generating greater demand for KLA's tools, as manufacturers require more precise and frequent checks to maintain chip quality and performance,” analysts wrote.
Despite KLA's size and profitability, which somewhat limit the potential for upside surprises, the company has consistently surpassed Street revenue estimates over the past three years. This includes periods of downcycle and US export curbs.
KLA shares have experienced strong growth, particularly since the introduction of ChatGPT in late 2022, with a 93% surge compared to the S&P 500's 40% increase, but its 2025 consensus revenue estimate has only increased by 16%.
As a result, the stock’s price-to-earnings (P/E) and revenue multiples grew to 20-30% above its five-year averages. KLAC retreated 15% off its high, but still remained less impacted than the likes of Applied Materials (NASDAQ:AMAT), Lam Research (LCRX), and ASML (ASML)
Oppenheimer notes that KLA's robust fundamentals and expected growth are reflected in its current valuation, which stands at 25.5 times its 2025 estimated earnings per share (P/E) and 20.5 times its enterprise value (EV) to EBITDA.
“Our $750 DCF PT is near the current price, 10% above the pre-ChatGPT peaks. We would become more constructive if numbers increase or volatility provides a nice entry point, as it often has historically in the WFE industry,” analysts said.