KLA's 96% Surge Highlights AI Optimism but Faces Steep Valuation and Cyclical Headwinds

What happened

KLA Corp's stock has jumped 96% over the past year, fueled by robust demand for advanced packaging, AI-driven semiconductor capex, and rising process control intensity in leading-edge fabs. This growth aligns with KLA's dominant market position, with FY25 revenue reaching $12.2B, gross margins around 61%, and a recurring services segment that provides stability. However, the DeepValue report reveals the stock now trades at approximately 40x EPS and 32x EV/EBITDA, over 230% above a DCF reference value, indicating a thin margin of safety. Key risks include cyclical wafer fab equipment spending, export controls impacting China sales, and high customer concentration with TSMC and Samsung each accounting for over 10% of revenue. Despite strong operational metrics, the current valuation embeds overly optimistic assumptions about a prolonged AI up-cycle, leaving investors exposed to potential corrections.

Implication

The rapid stock appreciation has pushed KLA's valuation to levels that assume a flawless, extended AI-driven semiconductor cycle, offering little buffer for any missteps or downturns. Historical volatility in the semiconductor equipment sector and ongoing export control uncertainties mean that even minor setbacks could trigger significant multiple compression from current elevated levels. Long-term holders may tolerate the high multiples due to KLA's strong moat and recurring services, but new investments are better timed during pullbacks when the risk-reward profile improves. Critical monitoring items include quarterly order trends, regional revenue shifts amid China restrictions, and services growth to gauge whether current optimism is justified. Ultimately, while KLA remains a high-quality franchise, the investment case now prioritizes valuation discipline over business fundamentals alone.

Thesis delta

The recent stock surge confirms market enthusiasm for AI and semiconductor themes but does not alter the DeepValue assessment that KLA is overvalued with limited margin of safety. Investors should view further gains skeptically and maintain a wait-for-better-entry stance, as cyclical, regulatory, and customer concentration risks persist unchanged.