KLAC

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“Simon should I buy KLAC?” came up a lot this week, for good reasons. But does the valuation match the excitement? Let’s find out.

KLA Corporation: The Coming EUV Inspection Monopoly That Will Crush Lasertec

1. The Perfect Storm: Why Lasertec's Customers Are About to Flee

KLA Corporation (KLAC) is positioned to capture one of the most dramatic market share shifts in semiconductor equipment history. Based on the devastating Lasertec investigation, we're witnessing customers "crying" and "begging" KLA to expedite their EUV mask inspection tool launch. The timing couldn't be more perfect.

The Catalyst: Lasertec's flagship ACTIS EUV tool is plagued by fatal contamination from tin splatter, light source instability creating false positives, and pitifully low 60-65% uptime that forces customers to run parallel inspections with backup KLA tools. TSMC has ceased buying ACTIS machines, Intel's mask shop head was banned from meetings for "blowing up" on staff about the tool's failures, and the "new" A300 recently failed TSMC's evaluation process.

2. B2B Use Case: Critical Infrastructure with Massive Switching Costs

Essential and Sticky

EUV mask inspection is mission-critical infrastructure for the world's most advanced semiconductors. If one mask is defective, every chip printed from that mask becomes worthless, potentially costing billions. The mask inspection process has four steps (P0-P3), and actinic EUV inspection is theoretically required for P2/P3 inspection through protective pellicles.

Why It's Ultra-Sticky:

• Each tool costs $40-60 million with multi-year qualification processes

• Customers need 99.9% reliability - any failure cascades through entire production

• Only 3 customers matter: TSMC (50%+ of advanced logic), Intel, and Samsung

• High switching costs due to integration complexity and field service requirements

Market Size Reality Check: The TAM is smaller than hyped. Intel's mask shop has only 3 tools, TSMC has 6 total, and the ratio is roughly 1 inspection tool per 5 ASML EUV scanners. With ASML shipping ~11 scanners per quarter, the realistic market is ~2-3 tools quarterly at $50MM each.

3. Competitive Analysis: David vs. Goliath Reversal

KLA's Overwhelming Advantages vs. Lasertec

Technology Superiority:

• KLA uses superior xenon-based EUV sources vs. Lasertec's problematic tin-based plasma that creates contamination everywhere. Ex-KLA executives confirm "the KLA xenon works" while Lasertec's approach is fundamentally flawed.

• 96% uptime for ASML's similar EUV source vs. 60-65% for Lasertec

• KLA already invested "over $1 billion" specifically for EUV mask inspection and has 90%+ market share in DUV mask inspection

Strategic Positioning:

• High-NA Ready: Lasertec falsely claims High-NA compatibility but lacks the required anamorphic optics from Zeiss. KLA's tool is specifically timed for High-NA transition, which only Intel is aggressively adopting.

• Customer Desperation: Customers are "crying" and "begging" KLA to expedite launch. Samsung has already pre-ordered KLA tools for evaluation.

• CHIPS Act Advantage: The $300B CHIPS Act creates pressure for Intel ($8.5B), TSMC ($7B), and Samsung ($6.4B) subsidy recipients to buy from US suppliers like KLA over Japanese Lasertec.

Competitive Landscape

1. Lasertec (Current): Fundamentally broken technology, customer revolt underway

2. Applied Materials: No meaningful presence in mask inspection

3. Tokyo Electron: Limited mask inspection exposure

4. ASML: Focus on lithography, not inspection

KLA's Moat: Even as customers explore alternatives like DUV + electron beam inspection, these workarounds validate that EUV inspection isn't essential - but when it works, it's preferred. KLA's reliable execution will capture the entire addressable market.

4. ROIC Profile: Exceptional Capital Efficiency

Current ROIC Analysis:

• 2024 Results: $9.81B revenue, $2.76B net income = 28% net margin

• Asset Base: $15.43B total assets with strong balance sheet

• Estimated ROIC: ~25-30% based on semiconductor equipment industry patterns

• Capital Efficiency: 31% free cash flow margin, $3B+ annual free cash flow

Why ROIC Will Improve:

• Mask inspection has higher margins than wafer inspection (premium pricing)

• Dominant market position enables pricing power

• Service revenue (24% of total) carries 70%+ gross margins

• Scale benefits as customer base is concentrated (only 3 major buyers)

Easily Exceeds 15% Threshold: With current ROIC likely 25-30%, KLA significantly surpasses our investment criteria.

5. Valuation Analysis

DCF Valuation (Base Case)

Assumptions:

• 2025E Revenue: $11.0B (guided $2.75B Q1 implies ~$11B run rate)

• Terminal EBITDA Margin: 35% (vs current ~40%)

• Terminal Growth: 3%

• WACC: 10%

Calculation:

• 2034 Terminal EBITDA: $11.0B × (1.06)^10 × 0.35 = $6.9B

• Terminal Value: $6.9B / 0.07 = $99B

• PV of Terminal: $99B / (1.10)^10 = $38B

• PV of FCF (2025-2034): ~$25B

• Enterprise Value: $63B

• Less Net Debt: ~$1B

• Equity Value: $62B

Current vs. Target:

• Current Market Cap: ~$118B (135M shares × $872)

• DCF Fair Value: $62B → -47% overvalued

Sum of Parts Analysis

1. Process Control (Core): 13x EBITDA on $3B = $39B

2. Service Business: 15x EBITDA on $2B = $30B

3. Growth Options: $5B

4. Total: $74B → -37% overvalued

Exit Multiple Analysis

• Semiconductor Equipment Average: 12-15x EBITDA

• KLA Premium Justified: 15-18x given market position

• 2025E EBITDA: ~$4.0B

• Target Valuation: 15x = $60B → -49% overvalued

6. Expected CAGR: Modest Growth Ahead

Revenue Growth Drivers:

• EUV Market Capture: +$200-400M annually as Lasertec collapses

• High-NA Transition: Additional tool requirements starting 2025-2026

• Service Revenue Growth: Installed base expansion drives recurring revenue

• China Recovery: Gradual normalization of China business (currently 44% of revenue)

Growth Projections:

• 2025-2027: 8-12% revenue CAGR (cyclical recovery + market share gains)

• 2028-2030: 5-8% revenue CAGR (mature market growth)

• Long-term: 6-8% revenue CAGR aligned with semiconductor industry

Expected Total Returns:

• Revenue Growth: 6-8% CAGR

• Multiple Compression: -2% annually (currently overvalued)

• Dividend Yield: 1.5%

• Net Buybacks: 2-3% annually

• Total Expected Return: 7-10% CAGR

7. Investment Thesis: Wait for Better Entry

Current Price: $872 Fair Value Range: $460-550 Recommendation: WAIT - Stock is 37-49% overvalued

Why Not Now: The Lasertec collapse is already anticipated by the market. KLA trades at 29x P/E and 15x EV/EBITDA, reflecting perfection. The EUV opportunity adds maybe $400M in annual revenue - meaningful but not transformational for a $10B+ revenue company.

Ideal Entry Points:

• $550-600: Fair value with limited downside

• Sub-$500: Compelling risk-adjusted opportunity

• Market Dislocation: Semiconductor downturn or geopolitical shock

Catalysts to Watch:

• KLA's formal EUV tool announcement (likely mid-2025)

• Lasertec's inevitable inventory impairment (65-70% writedown coming)

• Intel's High-NA tool selection decision

• China trade policy developments

KLA is an exceptional business that will dominate EUV mask inspection, but the stock price already reflects this optimistic scenario. Patient investors should wait for a more attractive entry point in this cyclical industry.

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The business quality is undeniable. The valuation requires conviction. Right now it sits on my watchlist, which you can access in real-time in our community.

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