KLA Corporation (KLAC): cheap despite the AI rush
2026-07-07 · By Lubin Danilo, founder of Lubin Investment
KLAC: see the full analysis on Lubin Investment
KLA Corporation makes the machines that check semiconductor quality before mass production, a critical niche in the chipmaking supply chain. It passes 9 of the 10 criteria in my screener and trades at roughly 7.7 times its free cash flow, far cheaper than most of its peers while the market gets excited about artificial intelligence.
Key takeaways
- KLA Corporation passes 9 of the 10 criteria in my screener, with a 35.7% net margin and a 37.9% cash return on invested capital.
- The stock trades at roughly 7.7 times its free cash flow, notably lower than several peers in the semiconductor equipment sector.
- KLA reports earnings on July 23.
- Point of caution: a 275-day accounts receivable collection period, quite long, reflecting a complex sales cycle with chipmakers.
What KLA Corporation does
KLA Corporation makes the equipment that checks the quality of silicon wafers at every stage of manufacturing, before chips are cut and assembled. It's a 'metrology and inspection' business: catching microscopic defects before they spread across millions of chips, an essential step as transistors keep shrinking and become harder to manufacture without error.
Solid profitability, a surprisingly reasonable price
KLA shows a 35.7% net margin and a 37.9% cash return on invested capital, levels reflecting a position of strength in its technological niche. Despite that quality, the stock trades at barely 7.7 times its free cash flow, a multiple that contrasts sharply with market enthusiasm for anything even loosely connected to artificial intelligence and semiconductors.
The striking contrast with Applied Materials and Lam Research
In the same semiconductor equipment sector, Applied Materials trades at 103.6 times its free cash flow for a quality score of 6 out of 10, and Lam Research at 78.8 times for a score of 8. KLA, with stronger financial discipline (9 out of 10) and a far lower price (7.7 times), illustrates a case where the market doesn't necessarily reward the best quality-price combination in a hot sector: enthusiasm sometimes concentrates on names more closely associated in investors' minds with the AI wave, regardless of relative fundamentals.
The point of caution: a very long sales cycle
One figure deserves attention: the accounts receivable collection period comes in at 275 days, a very high level reflecting a complex sales and billing cycle, typical of selling expensive industrial equipment to a limited number of very large customers (chip foundries). That's not a red flag on its own in this business, but it means KLA is exposed to the cash flow and payment timing of a handful of giant customers rather than a diversified base.
The moat: quality control, a three-player business
The semiconductor metrology and inspection market is dominated by a very small number of players capable of keeping pace with the miniaturization required by the most advanced foundries. It's not a business where a new entrant can catch up decades of accumulated expertise in a few years, which durably protects the market positions of established leaders like KLA.
What to watch on July 23
Beyond earnings per share, I'll watch new equipment orders tied to expanding advanced chip manufacturing capacity (particularly for AI), a leading indicator of future demand far more telling than a single quarter of already-billed revenue.
What I take away from this
KLA Corporation shows that being exposed to the same technology wave as more high-profile names doesn't guarantee the same valuation. Its combination of solid financial quality and reasonable price makes it an interesting counterpoint to far more expensive peers with sometimes lower quality, a useful reminder that the price paid for the same investment theme can vary enormously from one stock to another.
FAQ
What does KLA Corporation do?
It makes the equipment that checks the quality of silicon wafers at every manufacturing stage, an essential metrology and inspection step in semiconductor production.
Why does KLA trade cheaper than Applied Materials or Lam Research?
The market doesn't always reward the best quality-price combination in a hot sector: enthusiasm sometimes concentrates on names more closely associated with the AI wave, regardless of relative fundamentals.
When does KLA report earnings?
On July 23, 2026, after market close.
Why is KLA's collection period so long?
275 days, a high level reflecting a complex sales cycle typical of selling expensive industrial equipment to a limited number of very large customers (chip foundries).
What protects KLA from competition?
The semiconductor metrology and inspection market is dominated by a very small number of players, decades of accumulated expertise a new entrant can't quickly catch up on.
KLAC: see the full analysis on Lubin Investment
About the author
Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I find fundamental analysis fascinating, and it has delivered excellent results. For three years now, my performance has beaten the S&P 500. But analyzing every stock took too much time: sites with incomplete data, calculation methods and criteria never aligned with mine. And spotting the best stocks was just as time-consuming, even with my own well-defined checklist. So I put my software development background to work to build this software, base my investment strategy on its results, and share it with people who share the same passion as me. It judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).