Evercore ISI: Improved KLA supply drives growth, but valuation pressure prompts target price cut

How much did improved supply change results?

KLA revenue for the quarter ending in September 2026 was 4.136 billion dollars, up 13% quarter over quarter and 29% year over year, approximately 2.3% above market consensus; adjusted earnings per share were 1.22 dollars, above consensus.
The midpoint of the company’s revenue guidance for the quarter ending in December was 4.7 billion dollars, approximately 14% higher than the previous quarter and 4.4% above market consensus; adjusted earnings per share guidance was 1.44 dollars, approximately 5% above consensus.
As capacity for long-lead-time components began to come online, management expected revenue in the second half of 2026 to grow 25% from the first half, compared with its previous forecast of 20% growth. Supply remains tight, however, with some lead times exceeding 12 months; the company expects supply to continue improving in 2027, driving sequential quarterly revenue growth.

Management raised its forecast for 2026 wafer fabrication equipment spending from just over 150 billion dollars to the mid-150 billion-dollar range, and expects it to exceed 200 billion dollars in 2027. Evercore ISI is more optimistic, raising its 2027 base-case forecast from 215 billion dollars to 235 billion dollars.
The firm expects memory and advanced processes to be the main drivers: construction of new DRAM and HBM fabs, NAND technology upgrades and capacity expansion will drive memory equipment spending; advanced logic is supported by volume production on new process nodes and expansion of advanced packaging.
For KLA, larger HBM and conventional DRAM die sizes and greater use of extreme ultraviolet lithography will increase demand for process control; advanced logic investment is also expanding from a focus on 3-nanometer technology in 2026 to volume production at 2 nanometers and initial investment in 1.4 nanometers.
These forecasts depend on customer capacity expansion. Evercore ISI’s 2027 equipment spending model assumes year-over-year capital expenditure growth of 63%, 117% and 73% at Samsung, SK hynix and Micron, respectively, and approximately 40% at TSMC.

A greater share of service revenue and higher shipment volumes support gross margin, but price increases for memory and other components will offset some of the benefit. Management expects DRAM component price pressure to persist into 2027, with product price adjustments made mainly when new models or products are launched.
KLA’s gross margin for the quarter ending in September was 62.7%, and its guidance for the quarter ending in December is 62.5%. Evercore ISI expects full-year gross margin to rise to approximately 63% in 2027, only about 40 basis points higher than in its 2026 model.

Evercore ISI expects KLA revenue to reach 20.586 billion dollars in 2027, up approximately 29% year over year; process control equipment revenue is expected to grow 34%, driven jointly by investment from memory, foundry and logic customers.
The firm nevertheless believes semiconductor equipment is in the later stage of the cycle, and earnings forecast upgrades may coincide with price-to-earnings multiple contraction. During the 2021–2022 cycle, KLA earnings expectations were raised 59% while its price-to-earnings multiple fell from 25 times to 12 times.
The firm maintained its outperform rating and lowered its target price from 210 dollars to 185 dollars. Its base-case model uses approximately 7.5 dollars in earnings per share for 2028, a price-to-earnings multiple of 30 times, and discounts the forward valuation.