Phase Space AI

Valuation

KLA Corp [KLAC]

KLA Corp [KLAC] — Valuation

As of 2026-07-29 · framework v1.5.1 · spot $170.26 · shared comparator set: KLAC, LRCX, AMAT, ASML, TER

0. COMPANY STATE — declared first

STATE B — cyclical / commodity-sensitive.

• Test that put it there: revenue and margin driven by an exogenous cycle (WFE spend, fab utilisation, memory pricing). Ten-year operating margin spans 30.3% – 41.7% (median 37.6%), a 11.4pp range. valuation.md places LRCX in State B by name; the same test returns B for all three.
• Consequence: terminal margin must be mid-cycle-normalised on both revenue and margin, the cycle position must be dated, and the output must be trough / mid-cycle / peak earnings power rather than a trailing-peak extrapolation.
• Evidence grade: B. Twenty years of audited annuals, a full-cycle margin history, and complete segment/geographic disclosure. Held below A because the newest quarter (FY2026 Q4, ending 2026-06-30) is not yet in a 10-Q (KLA's FY2026 10-K is due ~August 2026) and therefore has no XBRL primary-source backstop; it comes from the earnings release.

Dating the cycle position — required, and not the same as normalising

valuation.md: "A median of annual observations over a partial window inherits that window's start point." So the window is stated explicitly. FY2022-FY2026 contains one complete WFE cycle — the FY2022 peak (39.7%), the FY2024 memory trough (37.1%) and the FY2025-26 AI-memory upswing (41.2-41.7%). A median across it is a mid-cycle figure with a dated start, not an artefact of where the window happens to begin.

Where the forecast begins in the cycle: at or very near the peak. Three independent markers, none of them a forecast: 1. Backlog coverage is falling while revenue rises (see KLAC_Research.md §2). 2. China revenue share has already rolled over from its FY2024 peak. 3. The name trades at the 98th percentile of its own ten-year TTM P/E history.

1. Terminal margin — set from the company's own economics

Terminal EBIT margin: 39.7%

Basis. Own FY2022-FY2026 median operating margin (39.7%), a window that spans the FY2022 WFE peak, the FY2024 memory trough (37.1%) and the FY2025-26 upswing — i.e. one complete cycle, dated. 2.0pp below the FY2026 trailing actual of 41.7%: the haircut is cycle normalisation at a dated peak, not structural decay.

Opex bridge. 60.9% gross - 11.2% R&D - 8.5% SG&A - 1.5% other = 39.7% EBIT; constraint 39.7% <= 60.9% satisfied.

Hard constraint check: m_EBIT,T (39.7%) <= m_gross,T (60.9%) — satisfied, using the five-year median gross margin (60.9%) rather than the higher trailing figure (61.3%), so the constraint is tested on the more conservative of the two.

Relation to trailing actual. Trailing FY operating margin is 41.7%; terminal is 39.7%, a gap of -2.0pp. The brief requires that a terminal margin below the trailing actual be justified rather than assumed. The justification is a named causal bridge: this is a State-B business observed at a dated cycle peak, and the terminal year is a mid-cycle year by construction. The haircut is the cycle, not a confidence discount smuggled into an operating assumption (which rule 5 forbids). Note also that the terminal margin sits ABOVE the ten-year median of 37.6% — the 10-year window is deliberately NOT used, because it embeds a structurally lower-margin pre-2017 era and using it would reject a real structural improvement on the grounds that it exceeds precedent.

2. The exit multiple is not a free parameter

EV_T / EBIT_T = (1-t)(1-g/ROIC) / (WACC-g)

With t = 0.15, g = 0.04, ROIC = 0.40, WACC = 0.095:

(0.85)(1 - 0.04/0.40) / (0.095 - 0.04) = **13.9x**

Exit multiple used: 13.9x EV/EBIT. Today's traded multiple is 39.5x, so the underwritten compression is 65% (39.5x → 13.9x). Per rule 3, an exit multiple below today's is often correct and is not itself a bear assumption; the test is consistency with terminal growth, ROIC, reinvestment and cost of capital, and the identity above is what supplies it.

Reference-class validity (rule 6). The comparator set is KLAC, LRCX, AMAT, ASML, TER — a WFE oligopoly plus ASML (litho) and TER (test) as reference. It satisfies n >= 5 mature profitable firms with a matching operating model. But it carries almost no information in the dimension being matched, and that must be said rather than hidden: KLAC, LRCX and AMAT trade at 39.5x / 40.9x / 40.6x EV/EBIT across operating margins spanning 29.5% to 41.7% and growth spanning 11.4% to 16.4%. There is no slope. This is the same failure valuation.md records as "29.9x / 29.9x / 30.4x across 8pp of exit growth, no slope". A peer-median exit multiple for this cluster is therefore UNIDENTIFIED, which is precisely why the exit multiple here is derived from the identity and the peer figure is used only as a sanity check.

3. Implied-path test — the Valuation Criteria (PRIMARY long-horizon output)

reverse_dcf.py --spot 170.26 --shares 1306.275 --net-cash -985 --revenue 13579.5 --years 5 --wacc 0.095 --terminal-margin 0.397 --exit-multiple 13.9

• Solved for: revenue CAGR.
• Held fixed: terminal margin 39.7%, exit multiple 13.9x, WACC 9.5%, 5-year horizon, net debt $985m, 1,306.3m shares, TTM revenue $13,579.5m.
• EV implied by today's price: $223,391m (16.45x current revenue).

VERDICT: FAIL. The price requires 36.2% revenue CAGR for five years against 14.0% demonstrated — a 22.2pp shortfall. Per criteria.md this would be PASS WITH ARGUMENT only if the excess were backed by a specific evidenced driver. The named driver (memory/HBM capex) is real, but the company's own backlog and deferred-revenue disclosure runs the other way — coverage is falling, not building — so the argument fails on the company's own evidence, not on narrative grounds.

Sensitivity — over the exit multiple, the highest-variance parameter

Flip point: the exit multiple at which today's price only requires the demonstrated 14.0% CAGR is 33.9x — against a traded multiple of 39.5x. So the bet embedded in today's price is not that KLAC grows: it is that KLAC still trades at ~34x EV/EBIT in 2031, having compressed barely at all, five years into a cyclical business. Stating it that way is the point of the instrument.

4. Twelve-month target — separate instrument, own multiple history

Target: $174.41 (+2.4% to spot $170.26).

• NTM EPS: $4.70. HOUSE-DERIVED. Alpha Vantage EARNINGS_ESTIMATES returns an EMPTY estimates array for KLAC (defect logged). Built from the Q4 FY2026 run-rate of $1.043 diluted EPS grown at the observed +5%/quarter sequential trend of the last six quarters.
• Multiple anchor: 37.1x = the 90th percentile of KLAC's OWN ten-year monthly TTM P/E history (n=121 months, Alpaca adjusted closes x AV normalised TTM net income on the current share count). Own history, not a peer median, per valuation.md.
• Current percentile: 98th (46.0x). Own-history anchors: p50 18.6x · p75 27.4x · p90 37.1x.

Why the 90th percentile and not the median. This is the calibration judgement, made explicitly. The median (18.6x) would put the target at $87 (-49%) and would be mean-reversion by reflex — exactly the error the brief names as the most expensive recurring one in this project. The 90th percentile keeps the multiple in the top decile of the name's own range, conceding that this cycle is larger than its predecessors and that the earnings are real, while declining to underwrite the 98th percentile as a base case for a further twelve months. The whole 12-month result in this cluster is a multiple judgement, not an earnings judgement — earnings estimates are rising and that is already in the NTM figure.

Note on target-below-spot. Item B16 warns that a process whose every target sits below spot is expressing a house market view rather than valuing companies. That check is passed here on cluster construction rather than by assertion: two of the three targets come out above spot (KLAC +2.4%, LRCX +0.8%) and one below (AMAT −9.8%), from the same method and the same percentile anchor. The dispersion comes from the names' own multiple histories, which is what it should come from.

5. Trough / mid-cycle / peak earnings power (State-B required output)

On 1,306.3m shares, applying the name's own ten-year operating-margin markers to TTM revenue of $13,580m, at a 15% tax rate:

Note this holds revenue at the trailing level and flexes only margin, so it isolates margin cyclicality. Revenue is itself cyclical, so a true trough combines both and is worse than the top row.

6. Downside case with a named cause (Downside Criteria — MEASURED)

Named cause: the RPO run-off completing. KLA's remaining performance obligation fell from $11.40bn to $7.86bn over FY2023–FY2025 while revenue rose. The permanent-loss mechanism is not a demand shock — it is that revenue has been drawn from a backlog that is now 40% less covered, so a normal cyclical pause arrives with no cushion. Combine a return to the FY2024 trough operating margin (37.1%) with a 20% revenue decline to $10.9bn — both of which KLA has printed inside the last three years — and EBIT is ~$4.0bn, net income ~$3.4bn, EPS ~$2.62. At the p50 of its own ten-year multiple (18.6x) that is $49/share, −71%. At the p75 (27.4x), $72/share, −58%.

Probability: 20% over the thesis horizon. This is a permanent-impairment estimate conditional on the cycle turning, not a volatility figure, and it is a genuine drawdown rather than a going-concern case — KLA has $4.9bn of cash and an investment-grade balance sheet. No going-concern flag.

Secondary named cause: China. $4.04bn (33%) of FY2025 revenue. A further export-control tightening on process-control tools is a live, dated policy risk and would hit a business whose China share has already fallen 10pp from FY2024.

7. Criteria summary

No position verdict is issued. The memo scores Criteria; the book decides.