KLA Rides on Strong Advanced Packaging Growth: More Upside Ahead?

KLA KLAC is benefiting from strong advanced packaging growth as demand for more powerful chips continues to grow. Increasing value of process control in the chip package bodes well for the company’s prospects. Demand for advanced semiconductor technologies, particularly evident in the 2-nanometer node, which is seeing higher levels of investment and process control intensity, continues to drive investments in AI. Increasing complexity and value of semiconductor packages, particularly for AI and High-Performance Computing (HPC) applications, is driving significant growth in KLAC’s advanced packaging business. 

In calendar 2025, KLA generated total systems revenues of $950 million, which jumped 70% year over year, primarily driven by advanced packaging revenue growth and market share gains. KLAC expects this momentum to continue in calendar 2026, with a year-over-year growth rate expected to be in the mid-to-high teens, driven by strong growth of process control products. Strong investments in WFE and advanced packaging represent a strong growth opportunity for the company. Growth of advanced packaging supporting heterogeneous chip integration has become a new market for KLA, which is currently worth $11 billion and growing faster than core WFE. 

KLAC expects the core WFE market to grow in the high single to low double digits in 2026, reaching the low $120 billion range, up from approximately $110 billion in 2025. The company expects the advanced packaging component of the market to grow at a similar rate to roughly $12 billion for a total market forecast in the mid-$130 billion range, an increase in the low double digits versus its forecast for 2025. 

KLA now expects third-quarter fiscal 2026 revenues of $3.35 billion (+/- $150 million), reflecting a modestly weak product mix on a sequential basis. The guidance also reflects the rapidly escalating cost of DRAM chips used in KLA’s image processing computers that ship with its systems, thereby hurting gross margin. Increasing lead times of its products due to supply constraints and negative tariff impact, roughly 100 bps, are headwinds in the near term. The Zacks Consensus Estimate for third-quarter fiscal 2026 revenues is currently pegged at $3.37 billion, suggesting 9.9% growth from the figure reported in the year-ago quarter.

Tough Competition Hurts KLAC’s Prospects

KLAC is facing stiff competition from the likes of ASML ASML and Applied Materials AMAT, both of which are well known for their process control offerings.

Sustained demand for AI and HPC chips by global data centers, AI labs and hyperscalers has reinforced ASML’s long-term growth outlook as the company provides extreme ultraviolet (EUV) semiconductor lithography tools to chip manufacturers that enable them to accelerate capacity expansion. ASML is also benefiting from a growing installed base, which is driving high-margin service and upgrade revenues as customers increasingly view upgrades as the fastest way to add capacity.

Applied Materials is at the forefront of AI-driven semiconductor innovations. It is a major manufacturer of semiconductor fabrication equipment, covering deposition, etching and inspection, serving the most crucial stages of chip manufacturing. AMAT expects its leading-edge foundry, logic, DRAM and high-bandwidth memory (HBM) to be the fastest-growing wafer fabrication equipment businesses in 2026.

KLAC’s Share Price Performance, Valuation & Estimates

KLAC shares have jumped 104.1% on a trailing 12-month basis, outperforming the broader Zacks Computer and Technology sector’s return of 24.4%.

KLAC Stock’s Performance

KLA stock is overvalued, with a forward 12-month price/sales of 13.17X compared with the broader sector’s 6.38X. KLAC has a Value Score of F.

KLAC Valuation

The Zacks Consensus Estimate for fiscal 2026 earnings is pegged at $36.58 per share, up 2.5% over the past 30 days, suggesting 9.9% growth from the figure reported in fiscal 2025.
 

KLA Corporation Price and Consensus

KLA Corporation price-consensus-chart | KLA Corporation Quote

KLA currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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