<div id="readability-page-1"><div><div>RundownI am a KLA Corporation bull and I'll tell you why. The company just recently posted strong earnings and raised guidance at the same time. I see no headwinds in the short or medium term for semiconductors and with the &#34;sticky&#34; MOAT KLA is bound to be a long-term winner. Bears are calling the stock overvalued, and they're right on current multiplesbut for a premium compounder with KLA's moat, the valuation works if you're buying durability, not cheapness.Management remains confident about outperforming the overall WFE (Wafer Fab Equipment) market. KLAC fits into the AI boom as a manufacturer of the chips (think sort of like a pick and shovel play). I believe momentum will continue to build and have a price target of $1555 in 2029, implying a CAGR of 12.2% until then.Company MOAT and what sets it apartWhat keeps KLAC from losing its MOAT is the incredibly high switching costs that would come if customers wanted to change. The packaging tools that KLAC has are deeply integrated with the semiconductor building process, meaning that customers would have to almost build a completely new factory if they wanted to change from KLAC. This is a textbook example of a &#34;sticky&#34; MOAT, and one of the strongest to have in my opinion.Besides this, what's setting KLAC apart is the fact it has taken market share away from Chinese manufacturers, in China too. In the Chinese markets US based companies like Applied Material or Lam Research have lost out to Chinese domestic businesses like Naura or Amec. But for KLAC, its largest Chinese competitor accounts for less than 1% of the overall process market there. This is yet another display of how well integrated KLAC's technology really is. The economic evidence is quantifiable: KLA generates 30%+ ROIC consistently and converts 95%+ of net income into free cash flow. The company maintains 60%+ gross margins despite customers like TSM having immense bargaining powerthis pricing power exists because the cost of defects far exceeds KLA's equipment cost. For a customer producing $10+ billion in semiconductors annually, even a 1% yield improvement justifies millions in inspection spending. This is the moat's foundation: value delivered exceeds price charged by enough margin that switching becomes economically irrational.In rough figures, KLAC has between 50 - 60% of the market share in semiconductor process controls globally. It has made its product into a necessity when making chips as its a quality assurance and better yield optimization which directly increases customers' profitability. The barrier to entry is also incredibly high with significant R&amp;D needs before getting a product on the market. Last year the company spent $1.3 billion in R&amp;D which is 11% of the revenues that came in.In its 2025 annual report KLAC mentioned the following companies as direct competition.Applied Materials, Inc., ASML Holding N.V ., Hitachi High-Technologies Corporation, Onto Innovation, Inc. and Lasertec, IncOut of these, I see Applied Materials and ASML as the biggest competitors. Applied Materials has been growing at a strong pace and has $5.3 billion in cash it could splurge on gaining more market share. ASML is an even bigger threat with $8.4 billion in cash and $14 billion in EBITDA. I still believe that the stickiness of KLAC's product will ensure its market share over the long term.In the annual report, KLAC also includes that it holds over 8,500 patents and has another 3,500 patents pending too. The expiration terms vary but run through 2044 giving it a long runway of growth still which further supports my thesis.Revenue breakdown and 3-year margin trendsKLAC has three segments: Semiconductor Control Process, Specialty Semiconductor Process and PCB and Component Inspection. KLAC generates the largest portion from the first segment, which also happens to be the fastest growing one at 25% YoY. I don't necessarily think that having 91% of revenues from one segment is a bad thing. Similarly to how Meta Platforms (META) has like all their revenues from advertising. <figure></figure>I found it very interesting to track the gross, operating and net margins for the past 5 years for KLAC. Gross margins have stayed very consistent but operating margins and net margins have moved very closely. This comes as a direct effect of KLAC staying conservative with OPEX. The efforts have meant operating and net margins are 41.2% and 33.4%. The high demand for expanding chip production means that KLAC has more bargaining power when setting its pricing. This thesis correlates with the margin trends I'm seeing.<figure></figure>In fact, the SG&amp;A expenses have only increased by $298 million annually since 2021 and R&amp;D by $432 million. During the same time frame, KLAC grew revenues by $5.2 billion. I expect that KLAC can maintain these margins over the next 3 - 5 years without too many issues. The company has a strong backlog worth $7.8 billion. This was a decrease YoY but shouldn't be taken as a negative because the material suppliers to KLAC actually made significant investments to deliver its goods to KLAC which meant it could push out orders at a faster pace.Out of the $7.8 billion KLAC expects to realize between 71% and 76% of this over the span of the next 12 months. KLACs largest region by revenue is China followed by Taiwan where it works with TSM, one of the world's largest chip manufacturers with its own monopoly.Its customer base might be heavily consolidated into a few bigger ones, but these are also the only ones that can really afford to spend so much on building out new facilities where KLAC can implement its technology.Compared to competitors like AMAT and LRCX, KLAC has outperformed both in terms of stock returns but also in revenue and earnings growth. Stock returns for KLAC has been 409% the past 5 years, compared to 187% and 236%. The 10-year CAGR in revenues has been 15.76% for KLAC and 11.59% and 13.36% for the others. On top of this wafer equipment spending has grown at 12% CAGR compared to the semiconductor space at 6%. The adoption of EUV and more and more scaling devices along with higher design starts have been key drivers for KLAC. On the second note, the cost design companies have to invest has risen drastically and KLAC has been a direct benefactor of this.Recent Results<figure></figure>Contrary to what the rest of the market felt about the recent results, I thought they were solid all around. Normalized EPS beat by a decent bit, $0,19 cents on a Non-GAAP basis. Revenues struggled but still beat on consensus by $39 million. Sure, there was slower growth this time around than last year, but the market is becoming slightly saturated. By this I mean many of the larger orders have been made but I'd expect it to start accelerating again in the last quarter as companies eye 2026 with more clarity. I can easily point to the drop being short-lived because since then the shares have surpassed where it was before earnings releases. Tariff impacts remain manageableoriginally projected at 100 bps on gross margins, now revised to 50-100 bps. At 60%+ gross margins, this is digestible. Other companies are suffering much worse than KLAC so frankly I'd rather be invested here than anywhere else now. Besides, the one area where investors should focus is service revenues. This is up 15.1% YoY. It's a high margin revenue stream and will more than likely offset any significant margin losses coming from global tariffs. Understanding The Industry And TechnologyOver 50% of all revenue that comes in is from Wafer Inspection. It makes up the bread and butter of KLAC and is also the fastest-growing area at 52% YoY. Second largest would be services, followed by Patterning but for this article, I find it more important to focus on the Wafer Inspection. It's an incredibly important process when producing semiconductor chips. Its the process of detecting, classifying and monitoring certain defects in the production line. The chips are built on ultra-thin wafers having a solid inspection throughout all of this ensures a much higher yield. For TSM for instance, it has certainly helped the company reach above 40% net margins.By 2035 the industry will grow to $11.9 billion at a 10.9% CAGR. I believe KLAC can quite easily capture the same growth here. It's further expected that optical detection technology will be the dominant use, something which KLAC uses.I remember reading one report I can't remember the name of now, it stated how the semiconductor industry is not secular in the same sense as commodities. It's instead structural, growing solely through the means of companies wanting to improve efficiency, raise margins and generate more earnings. This is where AI really can help out. Attractive Valuation Pointing To 61% Upside By 2029<figure></figure>Market estimates pin KLAC at a 2026 P/E of 24.8 and then 22.6 in 2027. The market anticipates a slowdown in EPS growth as the industry consolidates. My view differs because I think KLAC will see a lot more orders in the coming couple of quarters. There have been a lot of announcements of new data centers across the US. These sites then need to secure the chips to install and keep here. I don't fully think this has all come to TSM and Samsung. When it does, it might be too late to buy shares in KLAC. <figure></figure>I see KLAC growing its top line at a steady 15 - 16% annual rate until 2029 which seems highly plausible due to the growth in the Wafer Inspection market and KLAC's push to enter other ones too like PCB and Component Inspection. By 2029 this means $24.5 billion in sales and $8.9 billion in net income based on a 36.5% net margin then. I do think its possible KLAC increases gross margins further but I won't include it because COR might rise due to surges in commodity pricing.During 2024 KLAC also bought back $2.1 billion worth of shares and has an additional $5 billion authorized. During the June quarter, KLAC bought shares for $426 million, giving it an annual run rate of $1.7 billion which will be my baseline to estimate the share count in 2029. At $111 billion market cap means 1.54% in annual reductions. Since I believe the shares will increase, I will be more conservative and use 1.1% instead as the baseline. This gives us 125.8 million outstanding in 2029. EPS would be $70.7 making KLAC trade at a FWD multiple of 12.3.For a growth company, I believe a fair multiple is between 20 - 22. This $1,555 target depends on three interdependent factors: the wafer inspection market growing at 10.9% CAGR with KLA maintaining 50-60% share, net margins staying above 36% through improved service mix, and the market assigning a 20-22x multiple in 2029. If industry conditions weaken or the market reverts to viewing semiconductor equipment as cyclical (15-16x multiples), the target would compress proportionally. These assumptions are connectedweak demand typically brings both margin pressure and lower multiples simultaneously.Near Term ValuationKLAC trades at 27x 2026 earnings11.4% above the sector median. That's not cheap, but it's justified by structural positioning.Service revenues (growing 15.1% YoY at higher margins) improve the earnings mix, and the 50-60% market share in a structurally growing inspection market justifies paying up. But think for a second about what you are getting here. You get a business working in one of the fastest growing industries in the world. It has established a massive MOAT and the cost of entry is sky-high. If you have a short-term horizon then sure, don't buy the stock. But if you plan on keeping this one, like me, then I'd say it's undervalued based.Owner's PerspectiveAt today's $181 billion market cap, KLA yields just 1.88% in free cash flowlow by historical standards, but the question for long-term owners is whether that yield can grow at 10-12% annually for the next decade. The company converts 95%+ of earnings to cash and generates 30%+ ROIC, so the capital efficiency is there.The answer depends on semiconductor inspection remaining structurally necessary. If the wafer inspection market grows at the projected 10.9% CAGR and KLA maintains its 50-60% share through technological leadership, that $3.4 billion in annual cash flow becomes $8.8 billion by 2034. An owner buying today at $181 billion would see their cash-on-cost yield expand from 1.88% to 4.86% in ten yearsand 12.6% in twenty years if growth persists. This is the owner's value proposition: pay a premium today for a compounding machine in a structurally growing market with high switching costs. The 1.88% starting yield justifies current valuation only if you believe KLA's moat and market position remain intact for decades, not quarters. For me the choice is clear, just like the title says, &#34;Sticky MOAT is the best type&#34;. Over the long-term this FCF yield will compound and with a &#34;no-exit&#34; mindset there is a lot to gain here, even after an impressive show in 2025 so far. Risks against KLACThere is a lot I like about KLAC's business and its future, but there are also some concerns I have. Its largest customers are TSM and Samsung. The first has grown so large now that some plans are being made to establish in-house inspection as the cost of nodes becomes more and more expensive. This would erode the market share for KLAC and actually make it very difficult to gain any back. This is because its customers have an almost monopoly on the chip market already. Selling to smaller businesses would almost definitely mean a lot less in revenues. KLAC is losing out in certain niche markets within the inspection and metrology space. Japanese company Lasertec has now managed to claw its way to the top in EUV mask inspection. Besides this, the export licenses now required to ship certain semiconductor products to China has pushed the country into even more self-sufficiency. Over the long-term this implies a push away from foreign companies. Market share would be eroded as China substitutes its domestic manufactures and ensures more favourable contracts for them. How the end product would compete on the global market however is yet to be seen. Bullish/bearishI am very bullish on the long-term outlook of KLAC as I see its technology continuing to be industry standard. Its MOAT is incredibly sticky as the cost to change or switch out is incredibly high. It's also a proven technology which yields greater results for its customers like TSM. Based on my valuation of 22x 2029 earnings and a target price of $1555. From today this would secure a 12.2% CAGR for investors.Owning shares now means investing in a deeply integrated business with structural tailwinds and exceptional capital efficiencya premium worth paying for patient capital. </div></div></div>

KLAC

SOXL

KLA Corporation has reported strong earnings and raised guidance, positioning itself as a long-term winner in the semiconductor industry due to its "sticky" MOAT. The company boasts high switching costs for customers, making it difficult for them to switch to competitors. KLA holds a significant market share in semiconductor process controls and maintains high gross margins. Despite competition from companies like Applied Materials and ASML, KLA's extensive patent portfolio and consistent R&D investment support its growth. The company expects to continue its momentum with a price target of $1555 by 2029, reflecting a CAGR of 12.2%.

KLA Corporation - Sticky MOAT Is The Best Type