KLA Corporation On Track To Outperform In 2023

Key Points

• KLA Corporation had a better-than-expected quarter and gave acceptable guidance for Q4. 
• The shift toward next-gen and on-shoring US production is helping to drive business. 
• Analysts are Holding the stock and may provide a catalyst for higher share prices if they begin raising targets. 

While signs of topping within the semiconductor industry are growing, not all segments face the same headwinds, and KLA Corporation NASDAQ: KLAC is in the latter group. Reports from Texas Instruments NASDAQ: TXN and Samsung OTCMKTS: SSNLF lend truth to an outlook put forth by UBS just a week before those reports were released. In their view, weakening IT spending will impact chip stocks, and Texas Instruments reported weakening demand in all end markets except one, not just IT. They also see wafer-fab equipment companies in a better position due to rising demand out of China. 

The single market that grew for Texas Instruments is automotive, driven by the shift to EV and not the auto industry's growth. Bringing this back to KLA Corporation, it still sees demand due to shifts within the semiconductor industry, including China. That shift is toward new next-gen tech and AI coupled with the on-shoring of US production. The takeaway is that microchip demand is suffering, but investment in new technology and production capability is ongoing, which is good news for KLA investors. 

KLA Corporation Has Solid Quarter; Shares Move Higher 

KLA Corporation had a solid quarter with revenue of $2.42 billion, growing 6.1% compared to last year. This is 200 bps above the Marketbeat.com consensus figure and was driven by strength in products and services. Services led with a gain of 8.4% compared to 5.7% product growth; within that, only 1 reportable segment saw a decline in revenue. All others are up high-single to low-double-digits YOY and helping to drive robust cash flows. 

The company’s margins contracted because of rising costs, increased R&D spending and SG&A, but the takeaway is bullish. While costs are rising and net income is falling, cash flow still topped $1.01 billion with a 38% FCF margin relative to revenue. That is sufficient to sustain the dividend and share repurchases while improving the balance sheet. The company's cash balance is flat YOY, but inventory and assets are up, while debt and total liabilities are down. This leaves ample room to sustain annual dividend increases, which are also robust. 

KLA Corporation has increased its payout for 13 consecutive years and has a 16% distribution CAGR. This pace can be sustained based on the 20% payout ratio and cash flow outlook, although a slowdown might be expected. The only negative is that yield is tepid relative to the broad market at 1.45%, but share repurchases enhance it. The company bought back $478 million in stock compared to the $180 million it paid in dividends.

Regarding earnings and guidance, the company’s Q3 EPS fell sharply to $5.49 compared to last year’s $7.38 but beat the consensus by $0.20. Guidance for the 4th quarter was also issued, and expects revenue in a range bracketing the consensus figure with EPS slightly below. Given the market’s reaction, there was fear the figure could have been much worse. 

The Analysts May Give KLA Corporation A Lift 

The pre-release activity in KLA Corporation is light, but the analysts are holding the stock and see it moving higher by 10%. They may begin to lift their price targets now that the report is in, which would catalyze higher share prices. As it is, the stock is moving up and has gained more than 4% in premarket action. This move shows solid support at the $360 level that may produce a bounce and rebound over the next few days. If the market can get above $400, it may go to $440. If not, it will remain rangebound near the current levels.