Why KLA (KLAC) Is a Semiconductor Bright Spot in a Downturn

The semiconductor equipment sector has faced headwinds in 2025, with global supply chain disruptions, slowing chip demand, and heightened competition. Yet KLA Corporation (KLAC) has defied the gloom, outperforming both the S&P 500 and its struggling sector peers. This performance isn't a fluke: it's the result of a confluence of factors, including analyst estimate upgrades, a robust earnings growth trajectory, and the predictive power of its coveted Zacks Rank #1 (Strong Buy). Let's unpack why KLA stands out—and why investors should take note.

Analyst Estimate Revisions Signal Growing Confidence

The semiconductor sector's struggles have led to widespread downward revisions in earnings estimates for many companies. Not so for KLA. Over the past three months, the Zacks Consensus Estimate for its fiscal year ending June 2025 has increased by 2.1%, reflecting analysts' growing optimism. This upward momentum is particularly striking given the sector's broader challenges.

For the quarter ending in March 2025, KLA is projected to report earnings of $8.48 per share, a 28.5% year-over-year jump, while revenue is expected to rise 19.5% to $3.07 billion. For the full fiscal year, estimates point to earnings of $32.38 per share, a 36.4% surge from the prior year. These numbers aren't just growth—they're sustained, meaningful growth in a tough environment, signaling operational resilience and market share gains.

Zacks Rank #1: A Strong Buy Signal with a Proven Track Record

KLA's Zacks Rank #1 (Strong Buy) isn't arbitrary. The Zacks Rank system evaluates stocks based on earnings estimate revisions, a forward-looking metric that often precedes price appreciation. A #1 rank places KLA in the top 20% of all tracked stocks, a category that has historically delivered 25% annual returns since 1988.

In KLA's case, this has translated into even stronger results. A backtest from 2020 to 2025 of its performance when earnings exceeded estimates and holding for 30 days showed a 505.81% return, though with a maximum drawdown of -40.93% and volatility of 38.95%, indicating a favorable risk-adjusted return (Sharpe ratio of 1.01).

What's more, KLA was recently upgraded to a “Buy” recommendation (equivalent to Zacks Rank #2) in early May /25, reflecting analysts' belief that the stock has further upside. Even as the broader semiconductor equipment industry languishes—its Zacks Industry Rank of 149 places it in the bottom 40% of all 250+ industries—KLA's individual strength shines through.

Earnings Growth Trajectory: A Steady Climb

KLA's outperformance isn't just about quarterly beats—it's about a sustainable upward trend. The company has consistently delivered double-digit earnings growth over the past five years, and its current trajectory suggests this will continue. The 35% year-over-year earnings growth projected for FY2025 is a testament to its leadership in advanced semiconductor inspection and metrology tools, which are critical for chipmakers pushing the limits of nanotechnology.

Even the company's valuation metrics, while elevated, make sense in context. KLA's Forward P/E of 26.45 may exceed its industry's average of 18.6, but its PEG ratio of 1.63—slightly below the sector's 1.68—suggests its stock price is in line with its growth rate. In a sector where many peers trade at PEG ratios above 2, this is a relative bargain.

Why KLA Outperforms in a Challenged Sector

The semiconductor equipment sector's struggles stem from cyclical demand slowdowns and overcapacity concerns. KLA, however, has two key advantages:
1. Diversified End Markets: Its tools are essential not just for cutting-edge chips but also for memory, analog, and power devices, reducing reliance on any single segment.
2. Innovation Leadership: Its metrology and defect detection systems are critical for chipmakers achieving smaller geometries and higher yields, creating recurring revenue through service contracts.

These factors have allowed KLA to maintain pricing power and customer loyalty even as peers face margin pressures.

Investment Thesis: A Top Pick in a Challenged Sector

For investors, KLA offers a rare combination of defensive qualities (recurring revenue streams, high margins) and growth catalysts (5G adoption, AI-driven chip demand). The Zacks Rank #1 serves as a green light, and with shares up 7.6% over the past month versus the S&P 500's 6.9% gain, the stock is already moving.

Action Items:
- Buy on dips: KLA's stock may pull back on sector-wide concerns, but dips below $850 present entry points.
- Monitor earnings reports: Strong quarterly results could push the stock higher, especially if analysts raise estimates further. Historically, when KLA exceeds expectations, a 30-day hold has delivered an impressive 505.81% return since 2020, though with notable volatility risks (38.95% volatility, max drawdown of -40.93%).
- Compare to peers: While KLA's valuation is premium, its growth and Zacks rank make it a standout in an otherwise lackluster sector.

Conclusion

In a semiconductor sector facing headwinds, KLA's ability to grow earnings and attract analyst upgrades makes it a standout investment. Backed by a Zacks Rank #1 and a track record of outperformance—including a 505.81% return when earnings beat estimates and held for 30 days since 2020—it's a stock that could continue to shine even as the broader industry stumbles. For investors seeking quality in a tough market, KLA is a compelling choice.

As always, consult Zacks.com for real-time updates on KLA's rank and estimates.