Foundry is Majority of KLAC Business!

As we had projected, with KLA having the highest exposure to foundry/logic of any tool company, they are seeing the most near term strength as foundries (read that as TSMC) spend big for 10NM and 7NM. In addition the first tools you buy are yield management/metrology tools which KLA is the king of.

KLA put up numbers well above estimates….Generating $751M in revenue versus expected $733M and EPS of $1.16 versus street of $1.03. More importantly next quarter revenue is expected to be between $805M-$865M and EPS is expected to be between $1.28 and $1.48 this is way above street estimates of $770M and $1.19 in EPS

Is this to end or just begin? – Led Zep
We think KLA is at the beginning of a long run of strong demand to support both the 10NM and 7NM nodes. Industry expectations of 7NM being a “big” node like 28NM means a lot of equipment will need to be bought. Meanwhile 28NM capacity continues to be added. Unlike other tool companies where there seems to be investor concern about the sustainability of the current spending cycle, we think KLA is at the beginning …

Both Gen4 and Gen5…
KLA is seeing strong interest in both revamped versions of its Gen4 tools as well as its latest and greatest Gen5 tools. KLA is also seeing broad demand across its different product segments. We see no new significant competition in its core markets, and the company maintains its very strong market share as well as high gross margin that goes with that dominance

2017 could be a good year for KLA…
Given the strong start to the fiscal year coupled with good product positioning & mix as well as better foundry/logic demand we think KLA could be back on track to the strong performance it previously enjoyed before memory became so dominant in the market. While its clear that 3D NAND spend is still going strong we think the balance with foundry/logic will be more normal going forward and that helps KLA

The stock…
If we were to guess about a potential $6 EPS number for fiscal 2017 and then applied KLA’s historical 15X PE multiple to it , we get a $90 stock valuation which we think is well within a conservative range given KLA’s superior financial model and market dominance.

This obviously implies large potential upside in the stock, getting a nice dividend in the meantime doesn’t hurt either and likely limits the downside.

The KLA story has been hidden beneath the covers of the KLAM deal for the last year and we think as large, long only funds rediscover the name, we will likely continue to see strong steady improvement in the stock.

About Semiconductor Advisors
Semiconductor Advisors provides this subscription based research newsletter, Semiwatch, about the semiconductor and semiconductor equipment industries. We also provide custom research and expert consulting services for both investors and industry participants on a wide range of topics from financial to technology and tactical to strategic projects.