Citigroup reviews KLAC.US (KLAC.US) Q1 performance: raised profit forecast but lowered target price to $275 to reflect the decline in overall market valuation
The Zhitong Finance App learned that after KLAC.US (KLAC.US) handed over the report card of “exceeding expectations and raising the guidelines” for the September quarter, Citi raised the overall earnings forecast for FY2027-FY2029, but lowered the target price from $290 to $275 — the reason was not profit, but the multiplier: the valuation benchmark was reduced from 38 times to about 35 times to reflect the decline in the overall multiplier of the market. The rating remains a “buy”, corresponding to an expected share price return of 73.2% at a closing price of $158.77 on October 28, and a total return of 73.7% including dividends.
Citibank analysts Atif Malik and Elizabeth Sun judged that incremental supply is being launched to support strong AI-driven demand, and growth is accelerating in the second half of the 2026 calendar year; after supply constraints ease, the company expects continued month-on-quarter growth over the next few quarters, and sees 2027 growth as “more linear” than the second half of 2026 — not a step jump. At the beginning of the report, however, concerns were expressed: from an industry perspective, the tension in the supply chain has not been lifted.
Performance exceeds expectations
The company's results for the first fiscal quarter of fiscal year 2027 (ending September 30) released on October 28 showed revenue of US$4.136 billion, up 28.9% year on year, up about 13% from the previous quarter's US$3.658 billion; GAAP diluted earnings per share of $1.18 and non-GAAP diluted earnings of $1.22 per share were all above the midpoint of their respective guidance ranges. The consensus was adjusted earnings of $1.19 per share and revenue of $40.4 billion, which both slightly exceeded. Quarterly operating cash flow of $1.53 billion, free cash flow of $1.34 billion, and quarterly capital return of $1.24 billion.
The fiscal second quarter guidance is revenue of $4.7 billion ± $200 million, non-GAAP gross margin of 62.5% ± 1.0%, and non-GAAP earnings per share of $1.44 ± 0.11. CEO Rick Wallace said the September quarter “surpassed the midpoint of the guideline on all key metrics, confirming our previous expectations for accelerated growth in the second half of the 2026 calendar year”; he attributed the increase to increased leading process design, increased device size and value, increased storage complexity, and the growing importance of advanced packaging.
WFE: Over $150 billion in 2026 and over $200 billion in 2027
Management's judgment on the equipment market is in line with peers: in 2026, fab equipment expenditure (WFE) is in the middle of the $150 billion range, and in 2027 it is over $200 billion. Demand is strong on the three lines at the same time — leading process logic and OEM, DRAM, advanced packaging, and ongoing orders and visibility continue to improve.
One aspect of the structure is easily misinterpreted: the company expects storage to account for about 40% of its semiconductor process control system revenue next year, up from around 38% in 2026, and OEM and logic account for about 60%. Citi specifically stated that this caliber only counts process control system revenue from storage and foundry/logic customers, not packaging, wafer, and mask customers, and reflects KLA's own business structure, not WFE's structure — the company's judgment on WFE is still the growth of engineering and logic next year. Historically, the rise in the share of storage has often dragged down relative performance, but management doesn't see it that way this time: under the trend of increasing process control intensity, the company believes it can run faster than the market. Another detail: Approximately 90% of storage revenue for the September quarter came from DRAM.
Supply is the real variable in this round
The reason for the report's separate section on supply orders is straightforward: customers are still very anxious to deliver, and the company said it could have launched more systems if they had more supply — but the impact of supply constraints was not quantified. The launch of incremental supply supports the acceleration of growth in 2H26 (second half of the 2026 calendar year); after supply constraints ease, the company expects continued month-on-quarter growth over the next few quarters, and describes the 2027 growth pattern as more linear. Management's confidence in outperforming WFE in 2027 comes from four things: investment in leading nodes, increased DRAM process control intensity, expansion of advanced packaging, and improvements in its own supply capacity. Citi's reservations are here too — it is still concerned about supply chain constraints at the industry level.
Three dividing lines that are easily overlooked
No graphical wafer inspection. Order activity begins to appear. In previous years, the sector invested heavily and had a high inventory backlog, and customers have been digesting it, but now the utilization rate is high; management is beginning to see order activity for delivery, believing that this may be an upward source, and is expected to pick up next year. Currently, services are still the main focus, and the division's revenue plan for the middle of next year looks constructive.
Light mask inspection. The growth rate is roughly in sync with the overall market, but the extremely high price of a single unit makes this business fluctuate greatly. The increase in share mainly comes from re-certification; as the value of high-performance computing devices rises, the sampling rate has increased dramatically compared to the number of exposures, and management believes it can run faster than the market. The customer version of the new platform is being evaluated, and the first shipments are expected within about 6-9 months. High graphics resolution is actually needed to wait for the smaller characteristic size of high-NA, and the industry's plans for high-NA are closer to 2030; the 6×12 mask specification anticipates emissions and equipment demand earlier around 2033, and the entire product portfolio will eventually need to have this capability. The impact has been limited recently, but R&D investment is unavoidable.
PCB and component inspection. Currently, about 50/50 is distributed between PCB and component inspection, and the slope towards PCBs is expected to be around 60/40 or higher next year. Next-generation GPUs use high-density PCB materials that are harder, have more layers, and are harder to dissipate heat. They are driving PCB wire changes, and substrates and PCBs are also more integrated into advanced packaging; the business may grow slightly faster than overall process control next year, but PCBs still account for less than 90% of KLA's revenue — semiconductor process control accounts for more than 90%.
Services and fees. Service revenue is expected to accelerate with equipment shipments: new equipment enters the installed base much faster than old equipment exits, and the service contract attachment rate is still very high. According to current equipment forecasts, service is improving compared to the company's target model. The cost side is the inverse variable — operating expenses will increase by 2027 to $15 million per quarter, which is probably about double that level due to staff expansion, pressure on the pay of service workers in Korea and Taiwan, and rising depreciation; more details will be provided next quarter.
Profit increased, valuation multiples lowered
Citi pushed the revenue forecast for the 2027-2029 fiscal year to 18.674 billion, 22.205 billion, and 26.408 billion US dollars, corresponding growth rates of 37.5%, 18.9%; earnings per share forecasts were 5.67, 6.91, and 8.45 US dollars, compared to the previous values of 5.36, 6.59, and 8.11 US dollars. On the quarterly path, FY2027 was $1.44, $1.48, and $1.53 for the second to fourth fiscal quarters, respectively. Gross margin increased from 61.3% in FY2026 to 61.9%, 62.4%, and 62.8%, and adjusted operating margin increased from 43.1% to 47.0% and 48.1%. On a calendar year basis, CY2026/2027/2028 earnings per share increased by 3%/6%/4%, respectively.
The target price adjustment is in the opposite direction of profit: $275 corresponds to approximately 35 times the price-earnings ratio, compared to 38 times the previous $290. Citi called it “reflecting a lower market multiple,” and pointed out that 35 times is 25 times higher than the stock's three-year average, citing the sector's revaluation due to rising AI-related WFE exposure. Based on the closing price of $158.77 on October 28 and a market capitalization of $207.196 billion, the current price corresponds to a price-earnings ratio of 28.0 times FY2027E and 23.0 times FY2028E.
Citi's reasons for “buying” are two: the intensity of process control is increasing, and the AI-driven WFE multi-year upward cycle. KLA is a relatively “clean” target in these two logics. It lists three risks: increased or weakened competition from rivals such as Applied Materials (AMAT) and ASML.US (ASML.US); risk of inventory revisions from 10nm/7nm foundry; and the speed at which fourth-generation/fifth-generation products and EUV-related products are being adopted.