KLA: Semiconductor Equipment Stock To Invest In For 2022

KLA Corp is a supplier of process control and yield management solutions for the semiconductor industries. Its inspection and metrology products are categorized in various groups such as chip and wafer manufacturing, reticle manufacturing and packaging.
KLA Instruments was founded in 1975 by Ken Levy and Bob Anderson. Tencor Instruments was founded in 1977 by Karel Urbanek with an emphasis on metrology solutions.

The company's revenue for 2022 is expected to be $9.2 billion, with a fairly high gross margin of 63% compared to competitors, a market capitalization of $63.0 billion, with a steadily declining level of net debt due to a steadily growing FCF. The latter will make it possible to implement the buyback program in the future and provide an FCF yield of 4.9% already in 2022.
Investment theses:
  • The company consistently outperforms the S&P500 and NASDAQ and has shown triple-digit returns over the last 2 years. Stock performance is also impressive compared to other sub-sectors of the S&P.
  • KLA trades at pretty high P/E multiples of 19.6 X, above its own historical average but lower than the current S&P500 multiple. However, KLA has an attractive PEG ratio of 1.3X.
  • Overall, semiconductors generally outperform tech companies amid rising inflationary expectations. In addition, KLA's strong financial performance with high FCF returns, margins and pricing power, and a leading market position (>50%) is especially important in the current inflationary environment.
  • KLA has a powerful team of managers who have been working in company for a long time. The team has successfully dealt with challenges in supply chains compared to competitors.
  • Positive exposure to EUV adoption drives further potential growth. The process technology next year will require more precise equipment to track defects on silicon pads, which will increase significantly. This is also supported by the data on capital expenditures of major semiconductor manufacturers, which will show double-digit growth in 2022.

KLA Corporation remains our top pick within premium OEMs benefiting from a clear catalyst, the upcoming EUV transition and increasing complexity of semiconductor manufacturing. We're overweight KLAC due to high exposure to long-term secular trends and strong financials, which still provide reasonable upside.

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