KLA Corp: Wonderful Business, Lousy Price

Core Viewpoint - KLA Corp. is the leading supplier of process control and yield management solutions in the semiconductor industry, experiencing significant growth driven by EUV technology adoption and infrastructure investments in China, although future growth may face challenges [2][3]. Company Overview - KLA's Semiconductor Process Control segment generates over 90% of total revenue, with a diverse portfolio of inspection, metrology, and software products [3]. - In 2023, KLA reported revenues of $10.5 billion, up from $9.2 billion in 2022, with a gross profit of $6.46 billion compared to $5.79 billion the previous year [3][4]. Financial Performance - The Semiconductor Process Control segment's revenue increased to $9.32 billion in 2023 from $7.92 billion in 2022, with a gross profit of $5.96 billion [3]. - The wafer inspection revenue was $4.34 billion, showing a 41% increase from $4.01 billion in 2022, while patterning revenue rose to $2.79 billion, a 36% increase [4]. Competitive Position - KLA has consistently outperformed competitors like Applied Materials and Lam Research, with a 13% compound annual growth rate in process control systems revenue over the past decade [5][6]. - KLA's market share in process control has grown by over 500 basis points since 2018, reaching more than 56% in 2023 [6]. Growth Drivers - Key growth drivers include the adoption of extreme ultraviolet lithography, increased design starts, and strong growth in China until 2023 [6][8]. - The capital expenditure intensity for process control in logic is noted to be in the mid-teens percentage range, indicating robust demand for KLA's products [6]. Margin Profile - KLA enjoys higher gross margins compared to competitors, attributed to its strong market position, although its operating and net margins are less impressive due to higher selling, general, and administrative expenses [7][8]. Long-term Risks - Potential risks include leading-edge customers performing inspection in-house, competition from smaller companies in niche markets, and technological advancements in inspection and metrology [10][11]. - Geopolitical factors, particularly U.S. export restrictions, pose challenges to KLA's business in China, potentially impacting revenue from that market [12]. Conclusion - KLA exhibits characteristics of a strong business with significant shareholder returns over the past five years, but its current valuation appears high relative to industry standards and historical performance [13].