Shares of KLA Society (KLAC -2.51%) rose 14.3% in May according to data from S&P Global Market Intelligence. The semiconductor equipment company didn’t actually have much news in May; however, it reported profits in the final days of April. Unlike other mid-caps that missed out on profits due to supply constraints, KLA actually beat for revenue and profit. Still, with the outlook for semiconductor investing remaining positive even amid macro concerns, KLA found a bid after its valuation fell enough.
In its third fiscal quarter, KLA posted revenue of $2.3 billion, up 27.2%, with adjusted (non-GAAP) earnings per share of $5.13. Both figures exceeded analysts’ expectations. In the statement, CEO Rick Wallace said, “The demand environment for KLA’s products and solutions remains robust in a still challenging supply chain landscape, and we are focused on navigating this environment to meet consistently deliver customer commitments and achieve our long-term strategic goals. and financial goals.
KLA is by far the leader in process control equipment, which analyzes wafers and semiconductors for imperfections, making this equipment absolutely crucial for the production of advanced semiconductors. As more and more steps are required to produce advanced semiconductors, process control must be implemented at every stage of the technically challenging process to ensure quality yields.
Although this report came out in late April, KLA continued to rise in May, likely because the stock got too cheap relative to trade performance. After falling to around 15 times earnings, the stock seemed to be regaining its footing. Many battered tech stocks appeared to bottom during the month, at least in the short term, and the KLA was no exception.
Even at its current P/E ratio of 17.5, KLA looks cheap relative to its high 20% growth rate and high profitability. Although the semiconductor equipment industry has seen three consecutive years of growth and is known to be cyclical, there does not appear to be much cyclicality in KLA’s earnings or outlook. In fact, this year is expected to mark the seventh consecutive year of growth for the KLA, even including the trade war downturn of 2019 and the COVID-19 year of 2020, when other types of equipment stocks have experienced slight declines.
In its letter to shareholders, management also stated, “The semiconductor industry has evolved to become much more strategic and has an increasingly less cyclical end-market mix, with many fundamental drivers advancing the critical nature semiconductors in the global economy”.
Semiconductor equipment stocks tend to trade at lower multiples than the overall market, due to their performance in past cycles; However, if KLA management turns out to be right and the semiconductor industry becomes more of a steady growth industry, it is possible that the stock will reprice at some point. One would think that after seven consecutive years of growth, the UCK would have lost this reputation. While it is true that KLA is trading at a somewhat higher valuation than other burn and deposit equipment stocks, its mid-teen multiple and late-teen multiple still seem far too low for a growth stock. Maybe the market is starting to recover.