How would KLA grow its market share?‎

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KLA Corporation (KLAC) manufactures and provides equipment for the tracking, control and study of production processes for semiconductors. In the primary target market of production process control systems, company’s share is 48 percent. To produce and assemble this machinery, the company uses third parties. Producers such as Samsung, TSMC, Intel, and Micron are among the customers. The workforce is made up of 10,600 employees. It has its head office in the state of California.

KLA, especially during the ramp-up process, has an important mission in the semiconductor industry. There is a growing need to examine defects and emerging problems in metrology with the rising complexity of microchips. Advanced chips are most susceptible to the smallest modifications in the development process.

Principal risks:

Risks from currencies. The principal income of the U.S. company comes from abroad. In the US, revenues constitute just 11 percent of overall revenue. The manufacturing and research centers are based primarily in the United States and Europe. In China, there are only science and engineering facilities.

Reducing the capital investments intensity of semiconductor companies. The sector is traditionally highly dependent on economic cycles. The surplus in the memory chip industry has already contributed to a decline in sales in 2019, too. The larger portion of KLA’s revenue comes from logic chip hardware, which is less cyclical.

Given the American origin of the company and the key sales area in China with 25 percent of its total revenue, trade wars can pose a potential danger. Chinese manufacturers are currently concentrating on low-tech chips, but there are plans to develop high-tech ones, and they are trying to prevent this in the United States.

The share of KLA in the target market is nearly 50 percent. Applied Materials with 14% and Hitachi high-tech with 11% are the nearest competitors. In its subsectors, KLA also holds leading positions. This helps the company to retain elevated profitability (40 percent EBITDA margin).

KLA still looks reasonably priced after rising stock prices in recent months. Our 1/3/5 year target prices are $243/$267/$301 with HOLD/HOLD/BUY recommendations, respectively based on DCF model results and multiplier estimates. The stock price at close of the Friday session was $262.15.

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