Why KLA Stock Dropped Today

Key Points

• Applied Materials just warned of a coming sales and earnings miss this quarter.

• China is pulling back on purchases of semiconductor manufacturing equipment -- and KLA sells nearly as much stuff to China as Applied does.

• Bad news for Applied Materials could be nearly as bad for KLA.

• 10 stocks we like better than KLA ›

KLA (NASDAQ: KLAC), one of a handful of large companies manufacturing equipment for the production of semiconductors, tumbled 8% through 2:40 p.m. ET Friday afternoon.

The reason: One of KLA's big rivals, Applied Materials (NASDAQ: AMAT), just warned there's big trouble brewing in semiconductors.

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Applied Materials warns on semis

Reporting earnings for its fiscal Q3 last night, Applied Materials said sales grew fine, up 8% year over year, with rising profit margins and earnings per share also up 8%. The problem, however, wasn't what Applied earned in Q3, but what it won't earn in Q4.

Specifically, Applied warned it expects to earn only $2.11 per share in Q4. Adjusted for one-time items, this represents a 15% sequential decline in profit, when Wall Street was looking for an increase. Sales will decline about 8%.

What does this have to do with KLA?

So not great news for Applied Materials, but what does this have to do with KLA, you may ask? And well, here's the thing: Applied blamed "a dynamic macroeconomic and policy environment, which is creating increased uncertainty and lower visibility in the near term" for lowering its Q4 guidance. Applied especially highlighted sales weakness in China, which is said to be still "digesting" all the semiconductor manufacturing equipment it's already bought.

In 2024, Applied did more than 37% of its sales in China, according to data from S&P Global Market Intelligence. KLA did a similar 33% of its sales in China. Logically, therefore, the bad news hurting Applied Materials in Q4 is going to hurt KLA nearly as much. And with KLA stock priced at a sky-high 31 times earnings, the stock has a long way to fall on bad news.

All this means it may be time to start thinking about selling KLA stock.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Applied Materials. The Motley Fool has a disclosure policy.