KLA Corp (KLAC): Outperforming the Downturn with a Strong Buy Momentum

The semiconductor equipment sector has faced headwinds in recent quarters, yet KLA Corporation (KLAC) continues to defy the gloom. With a Zacks Rank #1 (Strong Buy)—placing it in the top 20% of all tracked stocks—KLAC has surged 41.7% year-to-date, far outpacing its struggling peers. This divergence underscores the company's resilience and its role as a critical supplier in a sector undergoing transformative demand.

A Zacks Rank #1: More Than Just a “Strong Buy”

The Zacks Rank #1 is no minor distinction. Historically, this rank has delivered 25% annual returns since 1988, fueled by its focus on forward-looking metrics like earnings estimate revisions. For KLAC, upward revisions have been steady: analysts raised EPS forecasts by 2.1% over the past three months, even as the broader semiconductor industry grapples with inventory corrections and macroeconomic uncertainty.

The rank reflects two key strengths:
1. Growth momentum: KLAC is projected to grow FY2025 EPS by 36.4% year-over-year, driven by its dominance in advanced inspection and metrology tools—critical for chipmakers pushing 3nm and beyond.
2. Valuation alignment: Despite a Forward P/E of 26.45 (above its industry average of 18.6), the stock's PEG ratio of 1.63 aligns closely with its growth trajectory, suggesting the premium is justified.

Navigating the Semiconductor Cycle: KLAC's Advantage

The semiconductor industry's volatility has penalized many stocks, but KLAC's position as a supplier to leading chip manufacturers insulates it from cyclical dips. Its tools are indispensable for maintaining yield in cutting-edge fabrication processes, making demand less discretionary than for other tech products.

• Revenue growth: Analysts expect FY2025 revenues of $12.05 billion (+22.8% YoY), with next-year estimates at $12.34 billion, signaling sustained expansion.
• Margin stability: Even as peers face margin pressure, KLAC's scale and proprietary technology allow it to maintain healthy margins.

Buying the Dips: A Strategic Entry Point

KLAC's recent pullback to $850—after hitting a 52-week high of $914.83—provides a tactical entry. Investors should:
1. Monitor earnings reports: The next report (due in July) could validate growth and drive further upside. Historical data shows a compelling opportunity: backtested results reveal that buying KLAC on positive quarterly earnings announcements and holding for 20 trading days from 2020 to 2025 produced a 27.8% annualized return with an excess return of 162.9%, despite a maximum drawdown of -20.9%. The strategy's Sharpe ratio of 1.23 underscores its risk-adjusted performance.
2. Compare to underperforming peers: While legacy chipmakers languish, KLAC's VGM Score of B (Value C, Growth B, Momentum A) highlights its balance between growth and stability.

The Case for Immediate Action

KLAC's valuation may deter conservative investors, but the PEG ratio's proximity to its sector average and its historically strong Zacks Rank performance argue for patience. The stock's momentum score of A suggests it will outperform as the industry's structural shift toward advanced nodes accelerates.

Final Take: KLAC is a must-own name in semiconductor equipment. Its Zacks Rank #1, robust growth, and inelastic demand profile make it a top pick for investors seeking resilience and growth. Buy dips below $850, and hold for the long term.

Disclaimer: Past performance does not guarantee future results. Always conduct independent research or consult a financial advisor before making investment decisions.