# KLA: a great franchise, priced for 25.5% revenue growth a year for five years KLAC, NASDAQ. Published October 23, 2026. Price as of the October 22, 2026 regular session close. Values in US dollars, per share figures adjusted for the June 2026 10-for-1 split. ## Verdict: REDUCE at $147.83 KLA is an excellent business, but the shares trade 72.5% above my Base value of $85.68. Only the Bull value of $173.94 clears the price, and even that leaves no margin of safety. The maximum buy price is $51.41. - Bear value: $42.48 - Base value: $85.68 - Bull value: $173.94 - Downside to base value: -42.0% - Maximum buy price: $51.41 - Required margin of safety: 40% - Buy range depending on method: $47.60 to $62.83 - Revenue growth the price implies, first five years: 25.5% a year (my Base: 14.3%) - Dividend yield: about 0.6% - Business quality: 84/100 - Valuation score: 13/100 - Confidence: 13/25, grade C KLA's shares are about 52% below their 52-week high of $307.37, and they still cost 40.4 times last year's GAAP earnings. The business behind them is as good as its reputation: a 41.7% operating margin, a $12.57 billion order backlog and a share count that has shrunk 3.2% a year for five years. The question is not whether KLA is a great company. It is how much of the next decade the price has already paid for. The stock closed at $147.83 on October 22, 2026, down 9.55% on the day from $163.43. The day before, Lam Research had reported and said supply constraints were holding back its December quarter, and the chip equipment group sold off. I do not treat one red day as a signal. At $147.83 the shares trade 72.5% above my triangulated Base value of $85.68, a downside of 42.0% to Base. The Bull value of $173.94 is 17.7% above the price, so a good outcome can support today's price, but only by delivering everything. A 40% margin of safety puts the maximum buy price at $51.41. For existing holders the verdict is to reduce, not to sell everything. New money should wait. Valuation route: semiconductor process control equipment. Economic classification: Compounder (9/12), with the cycle handled explicitly. Primary method: a ten-year discounted cash flow model. Secondary method: normalized EBITDA times a multiple. Both are present fair-value estimates, not 12-month price targets. KLA reports its September quarter on October 28, 2026, so this is a snapshot before that print. ## What KLA is KLA sells the machines and software that inspect and measure chips while they are being made, plus the service contracts that keep them running. It is not a foundry and not a memory maker. A single defect found early can save a customer far more than the tool costs, which is why KLA's tools are qualified into a fab and rarely replaced. Services brought in $3.13 billion in fiscal 2026, about 23% of revenue. The catch is who pays. International customers were about 87% of fiscal 2026 revenue, and Taiwan Semiconductor Manufacturing Company is a customer above 10% of sales. Orders from the best customers can still be postponed when a whole factory project slips, even if the tool itself is indispensable. Backlog stood at $12.57 billion on June 30, 2026, against $7.86 billion a year earlier, but delivery and installation timing are not guaranteed. ## The latest results | Fiscal 2026 (year to June 30) | Result | | --- | --- | | Revenue | $13.58 billion; $3.66 billion in the June quarter, 2.3% above the midpoint of guidance ($3.575 billion, plus or minus $0.2 billion) | | GAAP operating margin | 41.7% for the year; about 42.5% in the June quarter | | Net income / diluted EPS | $4.83 billion / $3.66 (non-GAAP $3.76) | | Operating cash flow / capex | $4.14 billion / $0.38 billion | | Free cash flow | $3.77 billion, 27.7% of revenue | | Returned to shareholders | $3.35 billion: $2.29 billion of buybacks and $1.06 billion of dividends | | September quarter guidance | Revenue $4.0 billion, plus or minus $0.2 billion; GAAP EPS $1.14, plus or minus $0.10 | Fiscal 2027 consensus expects revenue of about $18.1 billion and adjusted EPS of about $5.44, with free cash flow near $6.5 billion. That is third-party data and an expectation check, not company guidance and not an input to my Base. ## How much cash the business really keeps | Fiscal 2026 cash bridge | $ billion | | --- | --- | | Operating cash flow | 4.14 | | Capital expenditure | -0.38 | | Free cash flow as KLA defines it | 3.77 | | Stock compensation (employees paid in shares) | -0.31 | | Free cash flow after stock compensation | 3.46 | That is 71.6% of GAAP net income. Stock compensation is a real cost, so I deduct it. Over five years, free cash flow after stock compensation per share grew from $1.19 to $2.62, 17.2% a year, helped by a 3.2% annual drop in the share count. Total free cash flow grew only 14.0% a year, from $1.95 billion to $3.77 billion. Free cash flow margin barely moved, from 28.2% to 27.7%. For the model I normalize starting cash flow to $4.20 billion: operating profit after a 17% cash tax rate, plus depreciation, less all capex, less $0.52 billion of working capital investment (my estimate). That is about $0.65 billion above the cash statement figure, a contested input that I stress below. Maintenance and growth capex are not split in the filings, so every dollar of capex stays in. ## Balance sheet and shares Cash and marketable securities were $4.90 billion on June 30, 2026, against $5.95 billion of senior notes at face value. I hold $0.5 billion of the cash back as operating liquidity, which leaves net financial claims of $1.55 billion, about 0.26 times EBITDA. The first notes mature in March 2029. Preferred stock is zero. The model uses 1.315 billion diluted shares, based on the June quarter diluted count, against 1.3065 billion shares outstanding on August 3. At $147.83 that is a market value of about $194 billion. I do not have a verified post-August share count or September cash balance, and I did not invent one. ## Primary valuation: ten-year cash flow model I project free cash flow to the whole company year by year, discount it at 10%, and add a terminal value that grows 2.5% a year and still pays for the reinvestment that growth needs. The 10% rate is my estimate for a cyclical technology business, not a measured cost of capital. Margins start at 42% and fade to 39%, because a mature business facing competitors should not keep a peak margin forever. | Year | Revenue | Operating margin | Free cash flow | Present value | | --- | --- | --- | --- | --- | | 1 | 17.50 | 42.0% | 5.39 | 4.90 | | 2 | 19.95 | 42.5% | 6.53 | 5.40 | | 3 | 22.34 | 42.5% | 7.37 | 5.53 | | 4 | 24.58 | 42.0% | 8.06 | 5.51 | | 5 | 26.54 | 41.5% | 8.66 | 5.38 | | 6 | 28.40 | 41.0% | 9.19 | 5.19 | | 7 | 30.11 | 40.5% | 9.65 | 4.95 | | 8 | 31.61 | 40.0% | 10.05 | 4.69 | | 9 | 32.88 | 39.5% | 10.36 | 4.39 | | 10 | 33.86 | 39.0% | 10.58 | 4.08 | Dollar figures are in billions, with year 1 ending October 23, 2027. The ten years of cash flow are worth $50.01 billion today and the terminal value adds $55.86 billion, for an enterprise value of $105.87 billion. Subtract $1.55 billion of net claims and divide by 1.315 billion shares: **$79.33** per share. The terminal value is 52.8% of the total, over a ten-year horizon, and implies a terminal multiple of 10.3 times EBITDA. That is a plain reading of a mature business, not a bet that today's multiple lasts. ### Sensitivity: primary value per share | Discount rate \ Terminal growth | 2.0% | 2.5% | 3.0% | | --- | --- | --- | --- | | 8% | $104.41 | $110.38 | $117.54 | | 9% | $88.49 | $92.45 | $97.08 | | 10% | $76.57 | $79.33 | $82.48 | | 11% | $67.34 | $69.32 | $71.56 | | 12% | $59.97 | $61.44 | $63.08 | No cell reaches $147.83. Even an 8% discount rate with 3% terminal growth tops out at $117.54. ## Secondary valuation: normalized EBITDA As a cross-check I capitalize today's earnings power. Base EBITDA is $6.05 billion, fiscal 2026 operating profit plus depreciation, with R&D and stock compensation still treated as costs. A multiple of 23x is the most generous number in this article. It equals a starting free cash flow yield of 3.0% and, at a 10% rate, mathematically assumes growth of about 6.8% a year forever. I use it deliberately: it protects against being too pessimistic about how long KLA's franchise lasts, and it still sits below the market's current 32x. | Scenario | Normalized EBITDA | EV to EBITDA | Value per share | | --- | --- | --- | --- | | Bear | $5.00 billion | 17x | $63.46 | | Base | $6.05 billion | 23x | $104.72 | | Bull | $9.00 billion | 28x | $190.46 | Both methods share the same business, the same capital structure and the same exposure to the chip spending cycle. When they agree, that is not independent proof about the cycle, so I give no confidence credit for it. ### Putting the two methods on the same basis | Base case | Cash flow model | EBITDA multiple | | --- | --- | --- | | Enterprise value ($ billion) | 105.87 | 139.26 | | Net claims ($ billion) | 1.55 | 1.55 | | Equity value ($ billion) | 104.32 | 137.71 | | Value per share | $79.33 | $104.72 | | Implied EV to current EBITDA | 17.5x | 23.0x | | Implied equity to free cash flow after stock compensation | 30.2x | 39.8x | Debt, cash and share count are identical in both columns, so the whole $33.39 billion gap between the two enterprise values is one thing: how much the business is worth per dollar of current EBITDA, 17.5x against 23x. That bundles cash conversion and the fade to a mature multiple, and I cannot split it into separate dollar amounts without inventing precision. ## Historical and peer cross-check At $147.83 the trailing GAAP P/E is 40.4x, against a ten-year median of about 23.4x and a range of 10.0x to 73.4x from one data vendor. Price to reported free cash flow is 51.6x, and 56.2x after stock compensation. The historical range is a low-weight check because of the split and the mixed accounting basis. I give it no weight in Base. Peers are less clean than they look. On annualized latest-quarter EBITDA, KLA trades at about 29.4x enterprise value, Lam Research at about 20.8x and Applied Materials at about 22.9x. The quarters end in June, September and July, and the business mixes differ, so I show it as context and give the peer median no weight. A growth-adjusted check looks friendlier: on fiscal 2027 adjusted EPS of $5.44 the P/E is 27.2x, and with 44.7% adjusted EPS growth the PEG is 0.61. I do not use it. That growth includes a rebound in cash conversion, and I could only build a fiscal-year proxy, not a clean next-twelve-months panel. A low PEG on a cyclical rebound is not evidence of cheapness. ## Valuation triangulation | Method | Base value | Weight | | --- | --- | --- | | Ten-year cash flow model | $79.33 | 75% | | Normalized EBITDA at 23x | $104.72 | 25% | | Triangulated Base | $85.68 | 100% | The two methods differ by 27.6%. That is a warning, not a failure, and it is why confidence is only a C. I weight cash flow at 75% because cash left after investment is what an owner actually keeps, and give 25% to the multiple method so a harsh DCF does not decide alone. The weighted $85.68 is a point inside the $79.33 to $104.72 range, not a narrowing of it. The choice of method does not change the decision: the cash flow model gives a buy price of $47.60 and the multiple method $62.83, and the stock trades at $147.83 either way. ## What is the market already pricing in? Market value of $194.4 billion plus $1.55 billion of net claims gives an implied enterprise value of $195.9 billion. Holding my margins, tax, capex and terminal assumptions fixed, the price requires revenue to grow **25.5% a year for five years**, then fade. That means revenue of $17.05 billion next year, $42.3 billion in year 5 and $71.9 billion in year 10, against my Base of $26.5 billion in year 5. Alternatively, my entire Base cash flow path would have to be about 85% larger. This is one possible reading of the price. The market could instead assume higher margins, a lower discount rate or a richer multiple for a longer time. What it cannot assume is a normal year. ## Bear, base and bull scenarios | | Bear | Base | Bull | | --- | --- | --- | --- | | Year 1 revenue ($ billion) | 14.50 | 17.50 | 19.10 | | Year 1 operating margin | 37.0% | 42.0% | 45.0% | | Tax rate / capex to sales | 19% / 3.5% | 17% / 3.2% | 15% / 3.0% | | Discount rate / terminal growth | 11% / 2.0% | 10% / 2.5% | 9% / 3.0% | | Year 10 revenue ($ billion) | 19.75 | 33.86 | 55.66 | | Cash flow model value | $35.49 | $79.33 | $168.44 | | EBITDA multiple value | $63.46 | $104.72 | $190.46 | | Triangulated value | $42.48 | $85.68 | $173.94 | | vs $147.83 | -71.3% | -42.0% | +17.7% | **Bear:** customers cut spending, utilization falls and fixed R&D costs squeeze the margin. The two methods disagree by 56.5% here, so the honest range is $35.49 to $63.46. **Base:** a strong step up in the next two years, driven by AI related spending, then a steady fade as growth normalizes. **Bull:** revenue grows 22%, 20%, 18% and 15% in the first four years, margins reach 45% and the market prices lower risk because the durability has been proven. ## How the buy price is set Confidence C starts at a 35% margin of safety. I add 5 points for the risk that one large customer or one region is interrupted, beyond what the Bear case already models. That is 40%. A 40% discount to the $85.68 Base gives a **maximum buy price of $51.41**. Used separately, the two methods give $47.60 and $62.83, so the honest buy band is about $48 to $63 if my estimates hold. A margin of safety is a cushion I chose. It does not make the inputs more reliable. ## Dividend The latest quarterly dividend is $0.23 per share, or $0.92 a year, a yield of 0.62%. Fiscal 2026 dividends of $1.06 billion took 28.1% of reported free cash flow, and dividends plus buybacks took 88.9%. The payout is well covered, but at this yield KLA is a growth holding, not an income one. I add no value for future buybacks, because a repurchase above intrinsic value helps earnings per share more than it helps owners. ## Reasons to own KLAC - **Process intensity.** More complex chips need more inspection and measurement even without proportionally more wafers. This is the structural idea worth verifying. - **Qualification and workflow.** A proven tool is expensive to replace, which supports pricing and margins. - **Installed base.** $3.13 billion of service revenue earns cash after the tool has shipped, which dampens the cycle but does not remove it. - **Per-share economics.** Free cash flow per share after stock compensation compounded at 17.2% a year for five years. - **Financial flexibility.** Net claims of 0.26 times EBITDA leave room to keep investing through a normal downturn. ## What could go wrong? - **Expectations.** A premium price can fall even while profit rises. The price needs 25.5% growth a year for five years. - **The AI and wafer fab equipment cycle.** Customers can defer or cancel projects. Backlog conversion is the number to watch. - **Export controls and regional exposure.** About 87% of revenue is international. Restrictions on shipments or service could change the economics. - **Customer concentration.** TSMC is above 10% of sales, and a change in one leading-edge customer's spending moves the whole company. - **Competition and technology shifts.** Any share or pricing loss in process control would hit the margin assumptions first. - **Cash conversion.** Free cash flow was 71.6% of net income after stock compensation. Inventory and receivables can absorb earnings. - **Rates and taxes.** An 8% to 12% discount rate range moves the cash flow value from $110 to $61, and a 21% tax rate lowers it to $75.27. The strongest counterpoint to a bearish reading is real: a longer high-growth runway would make the current price reasonable even if my conservative Base is lower. ## Management execution Management credibility is good, with limited scored forecast history. KLA published a clear GAAP to non-GAAP reconciliation and a steady capital return policy. For the June quarter it guided revenue to $3.575 billion, plus or minus $0.2 billion, and delivered $3.658 billion. I checked only that one guide against its result, not a multi-year beat rate. The capital allocation test is not dollars announced but shares retired and the price paid for them. I give no speculative credit for future repurchases or unannounced acquisitions. ## Stock Analyza scorecard | Business quality | Score | | --- | --- | | Moat and pricing power | 18/20 | | Economic return | 17/20 | | Balance sheet | 13/15 | | Cash flow quality | 11/15 | | Growth and runway | 13/15 | | Management and capital allocation | 8/10 | | Dilution and governance | 4/5 | | Total | 84/100 | One caution on the return score: a simple operating profit on capital figure is about 70%, but it is inflated because R&D is expensed immediately, and I could not build a normalized five-year version. The score is not rounded up for it. The valuation score is **13/100**. | Valuation score | Score | | --- | --- | | Discount to Base | 0/40 | | Protection against the Bear case | 2/20 | | Agreement between methods | 6/15 | | Versus its own history | 1/10 | | Market-implied asymmetry | 2/10 | | Data and model robustness | 2/5 | | Total | 13/100 | | Economic classification | Points | | --- | --- | | Normalized return on capital (not verified over five years) | 0/2 | | Revenue growth (14.4% a year over five years) | 2/2 | | Free cash flow per share after stock compensation | 2/2 | | Balance sheet | 1/1 | | Unit economics | 1/1 | | Repeat economics (qualification and installed base) | 2/2 | | Reinvestment runway | 1/2 | | Total: Compounder | 9/12 | ## Confidence score | Confidence | Score | | --- | --- | | Data quality | 3/5 | | Business predictability | 3/5 | | Valuation robustness | 2/5 | | Accounting transparency | 4/5 | | Scenario dispersion | 1/5 | | Total | 13/25, grade C | An A grade is not possible because the key future inputs are estimates. The Bear case disagreement between the two methods and the missing post-June share and cash bridge pull the grade down. ## What I would watch from here ### Green - September quarter revenue at or above the $3.8 to $4.2 billion guided range, with a clean explanation of cash - GAAP gross margin around 60% or better - Service revenue growing high single digits or better - Operating cash flow less capex at 80% or more of net income - Net financial claims below 1 times EBITDA ### Yellow - Revenue in range but weaker cash conversion or a softer outlook - Gross margin of 57% to 60% - Service growth of 0% to 8% - Cash conversion of 60% to 80%, or backlog pushouts - More revenue concentration in one customer or region ### Red - Revenue below $3.8 billion with a weaker following quarter - Gross margin below 57% for two quarters in a row - Cash conversion below 60% for four quarters - Material backlog cancellations or lost export licenses - Net claims above 2 times EBITDA, or dilution that erases per-share gains The next review point is the September quarter report on October 28, 2026, after the US market close. I will rerun every scenario after it. ## The three most important thesis breakers 1. A sustained loss of process control economics, shown in gross margin or share, while chip spending holds up. 2. Cash conversion staying weak while profit rises, as receivables and inventory absorb the gain. 3. A restriction or interruption at a major customer or region that the Bear case does not already include. ## Stress test and independent check I recomputed all three scenarios, the sensitivity grid, the reverse valuation, the weighted values and the buy price from the raw inputs, and every figure matched to the cent. Reported figures were checked against KLA's fiscal 2026 results release, its 10-K and its dividend and earnings date announcements, and the price against the October 22 close. The estimated inputs are the 10% discount rate, the 17% cash tax rate, the $0.52 billion working capital investment, the $0.5 billion operating cash reserve, the margin path, the multiples and the 75/25 weights. Consensus and the historical P/E range come from third-party data. | Robustness test | Cash flow model | | --- | --- | | Base | $79.33 | | Consensus-centered: revenue $18.1 billion, 44% initial margin | $83.57 | | All cash flows 20% lower | $63.23 | | All cash flows 40% lower | $47.13 | | Tax rate 21% | $75.27 | | Working capital 25% of added revenue | $77.96 | | Capex 4.5% of sales | $76.03 | | Margins 3 points lower | $73.01 | | Generous case | $159.91 | The generous case is the strongest argument against my conclusion. It uses $19.1 billion of revenue, growth of 20%, 18%, 16% and 14% in the first four years, a 45.5% starting margin, a 15% tax rate, 3% capex, a 9% discount rate and 3% terminal growth, all at once. It supports today's price, but only without a margin of safety. Every other test stays below $84. Main data limit: I do not have an exact post-June share count or cash balance, a synchronized next-twelve-months growth panel, or a full historical multiple range, and a $0.5 billion cash error moves value by only about $0.38 a share. ## Final verdict: reduce at $147.83 The bull case here is not wrong about the business. It just needs everything to go right for ten years, and at $147.83 nothing is left over if it does not. **Verdict: REDUCE at $147.83, WATCHLIST for new money. Triangulated Base value $85.68, downside 42.0%, Confidence C (13/25). Required margin of safety 40%, maximum buy price $51.41, with a method-dependent range of $47.60 to $62.83.** For existing holders, reduce does not mean sell everything: exposure, taxes and your own view of the AI spending cycle matter. The Bull value of $173.94 shows why the call depends on economics rather than a prediction that the shares must fall. New money waits for a price near $51 to $63, or for evidence after October 28 that growth and cash conversion justify a higher Base. ## More analyses on Patreon This analysis is free. Premium members get every in-depth analysis, the full archive and a vote on which stocks get analyzed next: https://www.patreon.com/stockanalyza ## Sources Primary sources include KLA's [fiscal 2026 results release](https://ir.kla.com/news-events/press-releases/detail/518/kla-corporation-reports-fiscal-2026-fourth-quarter-and-full), its [fiscal 2026 Form 10-K](https://ir.kla.com/sec-filings/all-sec-filings/content/0000319201-26-000027/klac-20260630.htm), the [August 2026 dividend declaration](https://ir.kla.com/news-events/press-releases/detail/520/kla-declares-regular-cash-dividend), the [earnings date announcement](https://ir.kla.com/news-events/press-releases/detail/522/kla-announces-first-quarter-fiscal-year-2027-earnings-date) and the [April 2026 results release](https://ir.kla.com/news-events/press-releases/detail/514/kla-corporation-reports-fiscal-2026-third-quarter-results). Market data and consensus come from [StockAnalysis](https://stockanalysis.com/stocks/klac/) and a [historical P/E series](https://www.gurufocus.com/term/pettm/KLAC), and the Lam Research comment from [24/7 Wall St.](https://247wallst.com/investing/2026/10/22/lam-research-sinks-9-as-supply-constraints-cap-outlook-applied-materials-drops-6-asml-holding-falls-4/). Peer data come from [Lam Research](https://newsroom.lamresearch.com/2026-10-21-Lam-Research-Corporation-Reports-Financial-Results-for-the-Quarter-Ended-September-27,-2026) and [Applied Materials](https://ir.appliedmaterials.com/news-releases/news-release-details/applied-materials-announces-third-quarter-2026-results). The reference market price is $147.83, the October 22, 2026 regular session close. Financial statements run to June 30, 2026, and the September quarter has not been reported. **Disclaimer.** This analysis is provided solely for research and educational purposes. It is not personalized investment, financial, legal or tax advice. Values are estimates, not forecasts or trading instructions. KLA is exposed to semiconductor cyclicality, export controls, customer concentration and valuation risk. Investors can lose part or all of their invested capital. Method: Master Investment Analysis Framework v3.5. Approach: Ten-year cash flow model with a normalized EBITDA cross-check. Confidence: C/13. Data checks: passed with warnings. Open data gaps: post-June share count and cash, a synchronized next-twelve-months growth panel and a full historical multiple range.