KLA Corporation (KLAC): A Bear Case Theory

We came across a bearish thesis on KLA Corporation on StockOpine's Newsletter's Substack by StockOpine. As of 1^st  July, KLA Corporation's share was trading at $898.85. KLAC's trailing and forward P/E were 32.7 and 26.96 respectively according to Yahoo Finance.

KLA Corporation, a leader in process control and optical inspection for the semiconductor industry, has been an impressive performer with revenue growing at a 15.6% CAGR over the past five years, operating margins expanding from the 30% range to the 40s, and free cash flow growing 17.6% annually. However, with the stock's P/E now above 31x, nearly double the ~16x when first bought, the risk/reward is no longer considered compelling. Despite maintaining a dominant position with over 56% share in process control and >85% in optical inspection, and standing to benefit from AI-driven chip complexity and advanced packaging trends, the company is being sold due to valuation stretches.

The decision to sell KLA Corporation is not based on its performance but on its rerated stock price. The company's journey started in April 2022 at $345, with the best buy being in October 2022 at $258, now up over 230%. The stock's 168% return over the past 3 years is attributed to multiple expansion, with EPS growth contributing 8.6% CAGR and multiple expansion 29% CAGR. AI is transforming semiconductors, and KLA's process control tools are critical for managing growing chip complexity and advanced packaging, especially in logic and DRAM tied to AI workloads. However, growth expectations are believed to be already priced in.

Despite exiting KLA Corporation, the portfolio maintains a 31% exposure to AI-focused stocks, ensuring continued benefit from the ongoing technological shift. The Wafer Fab Equipment (WFE) market, where KLA operates, is expected to grow at a mid-single-digit percentage in 2025, reaching ~$138B by 2030, implying a CAGR of just 5.6%. This growth is solid but not enough to support the current multiple. The sale of KLA Corporation makes way for a new stock with a realistic 50% upside in the next 12 months, providing an attractive alternative.

Previously, we covered a bullish thesis on KLA Corporation by Quality Equities in January 2025, highlighting its potential as a backdoor play on AI energy infrastructure. The company's stock price has appreciated by 18% since our coverage. This is because the previous thesis played out as the company benefited from AI-driven chip complexity and advanced packaging trends. StockOpine shares a contrarian view, citing the stock's high P/E of 31x and valuation stretches, and has decided to sell the stock. The conviction in the thesis has weakened due to changes in valuation.

KLAC isn't on our list of the 30 Most Popular Stocks Among Hedge Funds. While we acknowledge the risk and potential of KLAC as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and have limited downside risk. If you are looking for an extremely cheap AI stock that is also a major beneficiary of Trump tariffs and onshoring, see our free report on the best short-term AI stock.

READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.

Disclosure: None. This article was originally published at Insider Monkey.