KLA Corporation (KLAC) Earnings Preview: Poised for Growth Amid AI Boom and China Headwinds

KLA Corporation is set to release its second-quarter earnings report, following in the footsteps of strong showings from industry peers ASML and Lam Research. With the semiconductor sector riding the wave of AI-driven demand, investors are eager to see if KLA will maintain its upward momentum or face headwinds from China-related normalization and broader market volatility.

Earnings Expectations and Market Performance

Analysts project KLA to report adjusted earnings per share of $7.75, reflecting a year-over-year increase of approximately 26 percent. Revenue is expected to come in at $2.95 billion, representing a 19 percent gain. The company's own guidance projects adjusted earnings in the range of $7.15 to $8.35 per share, with revenue between $2.8 billion and $3.1 billion.

The stock has already had a strong start to 2025, surging by more than 22 percent before retracing slightly last week. Despite this pullback, shares remain up roughly 16 percent year-to-date, supported by favorable industry trends and investor confidence in AI-driven semiconductor expansion.

The Impact of AI on KLA's Growth

Artificial intelligence has been a defining catalyst for semiconductor capital equipment companies, including KLA. AI-driven data center expansion has heightened demand for advanced semiconductor manufacturing technologies, particularly in areas like wafer fabrication equipment (WFE). Both ASML and Lam Research have emphasized how AI-related demand is counterbalancing weaknesses in other semiconductor segments, such as traditional PCs and smartphones. Given this backdrop, KLA is expected to highlight similar trends in its earnings call.

KLA's metrology and process control solutions are critical for AI chip manufacturing, ensuring higher yields and efficiency for chipmakers. As AI workloads push for more sophisticated semiconductor designs, KLA is well-positioned to benefit from continued investments in next-generation fabrication technologies.

China’s Role in KLA’s Revenue and the Impact of Export Restrictions

One of the more pressing topics for investors is KLA’s exposure to China, which historically accounts for around 40 percent of the company’s revenue. However, as noted in the previous quarter, KLA expects its China-related revenue share to decline to approximately 30 percent due to tightening export controls.

Both ASML and Lam Research have already acknowledged the effects of U.S. restrictions on sales to Chinese customers, suggesting that KLA is likely facing similar headwinds. While demand from other global markets has helped offset this trend, the normalization of revenue from China could limit KLA’s near-term upside. Investors will be listening closely for any updates on how the company is navigating these regulatory challenges.

Wafer Fabrication Equipment Spending Trends

WFE spending is a key industry metric, as it indicates semiconductor manufacturers' willingness to invest in new equipment. Lam Research recently projected that total WFE spending will rise modestly in 2025 to around $100 billion, compared to approximately $95 billion in 2024. If KLA aligns with this forecast, it would signal sustained demand for semiconductor manufacturing tools.

Given the company's strong track record of earnings outperformance, it would not be surprising if KLA once again beats both revenue and profit estimates. However, one pattern that has emerged over the past three quarters is that while KLA has consistently exceeded expectations, its guidance has only met analyst forecasts. Should this trend continue, there is a risk of a sell-the-news reaction, particularly with broader market conditions in focus.

Market Sensitivity and Broader Risks

Another factor to consider is the broader market environment. The semiconductor sector remains highly sensitive to movements in mega-cap tech stocks, particularly Apple, which is set to report earnings on the same day as KLA. Any significant post-earnings reaction in Apple’s stock price could influence overall market sentiment and spill over into semiconductor-related stocks.

Additionally, macroeconomic conditions, including interest rate policy and inflationary pressures, could impact investor sentiment. While AI-driven demand has created a strong tailwind, broader market volatility could lead to profit-taking, particularly after the strong gains KLA has seen to start the year.

Conclusion

KLA Corporation enters its earnings report with high expectations, bolstered by a strong AI-driven semiconductor market and recent positive results from its industry peers. While the company is well-positioned to benefit from rising WFE spending and AI-related demand, China’s revenue normalization and ongoing export restrictions remain key risks to watch.

If KLA delivers another quarter of solid earnings growth and provides upbeat guidance, shares could extend their recent rally. However, if management issues only in-line guidance, as has been the case in previous quarters, the stock could experience a pullback as investors lock in gains.

With AI continuing to shape the semiconductor landscape, KLA remains a key player in the industry’s ongoing evolution. Investors will be closely watching for any signals on how the company plans to sustain its growth in the face of geopolitical and regulatory challenges.