KLA Corporation's $850M Advanced Packaging Play: A Structural Growth Engine in the Semiconductor Revolution

The semiconductor industry is undergoing a seismic shift. As artificial intelligence, high-performance computing, and 5G infrastructure demand ever more powerful chips, the old model of simply shrinking transistors has hit physical limits. The new frontier is advanced packaging—a cutting-edge technique that integrates multiple chips or components into a single package to boost performance while minimizing size and power consumption.

KLA Corporation (KLAC) stands at the heart of this revolution. With its $850 million advanced packaging revenue target for 2025—a 70% jump from 2024's $500 million—the company is positioning itself as the critical enabler of this structural shift. But this is more than just a revenue milestone. It's a signal of KLA's dominance in a space that's essential to the future of semiconductors, with its process control and metrology tools acting as the unsung heroes of leading-edge manufacturing.

Advanced Packaging: The $850M Catalyst

Advanced packaging isn't just a niche technology anymore. It's the $100 billion opportunity that's driving consolidation in the semiconductor supply chain. KLA's tools are indispensable here: they ensure the precision and reliability of 3D stacking, chiplet integration, and other techniques that allow chips to communicate at atomic scales.

CEO and CFO comments at the Bank of America Global Tech Conference 2025 underscored this: Bren Higgins, KLA's CFO, noted that advanced packaging now accounts for 70% of process control growth, a segment where KLA holds a near-monopoly. This isn't incremental—it's foundational. As companies like Intel, TSMC, and Samsung pour billions into advanced packaging R&D, KLA's tools are the first to be called.

Service Business Resilience Amid Geopolitical Crosswinds

While KLA's advanced packaging ambitions grab headlines, its service business is a quiet powerhouse. With tools lasting decades and requiring constant calibration, KLA's service revenue is a recurring cash cow. Even as geopolitical tensions with China threaten to shrink its revenue contribution from over 40% in 2024 to ~30% in 2025, the service stream remains robust.

The numbers tell the story: 75% of KLA's service revenue comes from existing contracts, insulating it from one-off geopolitical shocks. Meanwhile, its service business is growing at low double-digit rates, a testament to the durability of its installed base. This resilience isn't just about China—it's about KLA's tools being too critical to replace, even as new players emerge.

Margin Resilience: The 63% Gross Margin Target

KLA isn't just growing top-line revenue; it's also cranking up profitability. The company now targets a 63% gross margin in 2026, up from mid-60s guidance for 2025. This isn't smoke and mirrors. It's the result of the KLA Operating Model, a restructuring program focused on automation, supply chain efficiency, and free cash flow maximization.

While peers struggle with cyclical pricing pressures, KLA's margin expansion is structural. Advanced packaging tools command premium pricing due to their complexity, and the service business operates with minimal incremental costs. Add in the geographic pivot away from China's volatile market, and KLA is building a profit engine that's insulated from industry cycles.

Positioning for the 2nm Era and Beyond

KLA's leadership isn't limited to advanced packaging—it's about being the go-to partner for leading-edge nodes. As chipmakers push toward 2nm and beyond, the need for atomic-level precision in etching, deposition, and inspection becomes existential. KLA's tools are the only game in town for many of these processes.

This is a high-intensity process control market, and KLA's dominance here creates a moat. Even as the WFE (wafer fab equipment) market matures, the process control segment—where KLA holds ~50% share—is outpacing the industry by double digits.

Conclusion: A Structural Play on Semiconductor Evolution

KLA is no longer just a supplier of inspection tools—it's a critical enabler of the next era of computing. With $850M in advanced packaging revenue, 63%+ margins on the horizon, and a service business that's recession-proof, this is a stock built to withstand geopolitical storms and capitalize on secular trends.

The math is compelling: KLA's growth drivers are decoupled from near-term chip demand. Even as the broader semiconductor sector faces inventory corrections, KLA's structural advantages—technology leadership, recurring revenue, and margin resilience—make it a buy-and-hold for the next decade.

Investors seeking exposure to the AI revolution, 5nm+ nodes, or advanced packaging shouldn't look past KLAC. This isn't a cyclical bet—it's a structural one.