KLA Corporation (KLAC)

Conclusion

KLA Corporation supplies process control and process-enabling equipment to semiconductor and electronics manufacturers, through segments that include semiconductor process control, specialty semiconductor process and PCB and component inspection. At 151.38 USD on 9 November 2026, the company has a market capitalisation of 197.2 billion USD.

The verdict is overvalued. The fair value band runs from 57.12 to 85.68 USD with a midpoint of 71.40 USD, and at the current price the margin of safety is -52.8%. Today's multiples sit well above their own ten-year medians: P/E of 37.5 against 24.8, EV/EBITDA of 31.7 against 17.3, and price to free cash flow of 48.9 against 20.9. The DCF gives 60.67 USD per share at a discount rate of 12.36%. The reverse DCF implies revenue growth of 26.2% a year, while revenue has compounded at 14.4% over five years and free cash flow per share at 17.8%.

What supports the case is the quality of the business. ROIC is 68.4% against a WACC of 12.12%, operating margin is 42.6%, and the company has 8 of 8 earnings beats in the last eight quarters. The balance sheet is strong, with net debt to EBITDA of 0.20 and interest coverage of 21.9. What would break it is the price itself. Price to free cash flow of 48.9 against a median of 20.9 leaves little room for error, and the implied growth of 26.2% is well above what the company has delivered.

Financial health

Financial strength is green, held up by a current ratio of 2.76, a quick ratio of 1.72, net debt to EBITDA of 0.20 and interest coverage of 21.9. Debt to equity is 0.92, which is moderate for a company of this profile. The Altman Z-score is 12.68, in the safe zone; the model was designed mainly for manufacturers, and KLA makes equipment, so the reading applies well here. Insolvency risk: low, about 0.2% by the estimate of the Ohlson model over one to two years. Financing does not look like a constraint on the business.

Earnings quality

Earnings quality is green, supported by free cash flow conversion of 91.9% over five years, a Piotroski score of 7 out of 9 and a share count that fell at a compound rate of 3.2% over five years, which points to buybacks. Conversion is lower on a trailing basis at 76.8%, and stock-based compensation is 2.2% of revenue, leaving free cash flow after stock compensation of 3.71 billion USD. The accrual ratio of 4.0% is modest. The Beneish M-score is not available. Analysts have raised estimates: the current-year estimate rose 5.9% over 90 days with no downgrades in the last 30 days, and the next-year estimate rose 8.4%, with 16 upgrades against 2 downgrades.

Profitability

Profitability is green. Gross margin is 61.5% against a ten-year median of 60.4%, operating margin is 42.6% against 37.6% and net margin is 36.3% against 29.1%. ROIC of 68.4% against a WACC of 12.1% gives a ROIC minus WACC value of 56.3%, and the five-year median ROIC is 61.4%. Return on equity of 80.6% is inflated by leverage: the DuPont split shows a net margin of 35.6%, an asset turnover of 0.76 and an equity multiplier of 2.83. Most of the return comes from margins and capital efficiency, not from borrowing.

Growth

Growth is green. Revenue has compounded at 9.0% over three years, 14.4% over five years and 16.4% over ten years. EPS compounded at 14.9%, 22.3% and 23.3% over the same periods. Revenue grew in 9 of the last 10 years. Growth has been strong for a decade, but the recent three-year pace is slower than the longer-term rates, and the valuation depends on that pace being sustained.

Valuation

Valuation is red. The verdict is overvalued, with a margin of safety of -52.8% at 151.38 USD. Against ten-year medians, the premiums are 51.4% on P/E, 83.3% on EV/EBITDA, 133.6% on price to free cash flow, 106.9% on price to sales and 50.8% on price to book. The DCF is 60.67 USD per share, at a discount rate of 12.36% and long-term growth of 2.5%; about 47.7% of its value sits in the terminal value. The fair value from historical multiples is 82.13 USD. The fair value band rests on fixed assumptions, a 5% equity risk premium and capped growth, so it is an order of magnitude, not a price target. The dividend yield is 0.56%, with a payout of 27.5% of free cash flow.

Risks

The main risk is valuation. If growth slows toward the three-year pace, the implied growth of 26.2% would look even harder to justify, and the price could converge toward the fair value band. Weaker cash conversion, down from 91.9% over five years to 76.8% on a trailing basis, would reduce the cash behind earnings. A fall in margins from 42.6% toward the ten-year median of 37.6% would hit returns.

The Beneish M-score is not available, so manipulation risk cannot be checked with this model. The data do not include a debt maturity schedule or revenue by segment, so the timing of obligations and the contribution of each division cannot be assessed. The DCF and the fair value band depend on fixed assumptions, and this analysis does not test how sensitive they are to changes in them.