Morgan Stanley: KLA’s two-sided DRAM business: rising inspection demand, but chip costs constrain gross margin

What changed with the results and guidance?

KLA reported revenue of 4.136 billion dollars for the quarter ended September 2026, up 28.9% year over year and above the market consensus of 4.043 billion dollars. Adjusted earnings per share were 1.22 dollars, also above the consensus of 1.19 dollars.
The midpoint of the company’s revenue guidance for the December quarter was 4.7 billion dollars, above Morgan Stanley’s forecast of 4.544 billion dollars. The midpoint of adjusted earnings-per-share guidance was 1.44 dollars, above the bank’s forecast of 1.38 dollars. The gross-margin guidance midpoint was 62.5%, 0.2 percentage points below the previous quarter’s actual figure.
The company also raised its 2026 wafer fabrication equipment spending forecast from slightly above 150 billion dollars to approximately the midpoint of 150 billion to 160 billion dollars, and expects spending to exceed 200 billion dollars in 2027.

KLA expects memory to account for 40% of its business mix in calendar 2027. Morgan Stanley had previously expected that share to fall significantly in the second half of 2027, reaching 34.3% for the full year, compared with its model estimate of 32.2% for 2026.
The bank had previously believed DRAM manufacturers preferred to expand capacity on existing process nodes and avoid the yield risks of upgrading. After discussions with management, it concluded that the opposite would be true beginning in the December quarter.
KLA’s equipment growth lagged that of etch and deposition equipment in 2026, partly because investment favored upgrades to existing production lines and, more importantly, because equipment supply was constrained. As the DRAM pricing environment improved, the economic value of each incremental yield improvement increased, and customers had wanted to buy more KLA equipment.

High-bandwidth memory (HBM) chips are larger and integrate more logic functions, and the value of the additional memory capacity produced has risen. Customers therefore need to invest more in inspection and process control during production. Morgan Stanley says process-control spending intensity for some DRAM products has reached approximately 15%.
That proportion does not apply to all advanced DRAM: overall process-control spending intensity for advanced DRAM remains at 12%–13%, but the bank believes KLA sees a path for it to rise structurally.
Meanwhile, the image-processing systems in KLA’s equipment also require memory chips. The company said persistently high memory costs offset some of the operating leverage from greater scale. Morgan Stanley believes procurement is not constrained, but prices are unfavorable, so it forecasts a calendar 2027 gross margin of 63%, with limited upside.

As equipment supply constraints ease, Morgan Stanley has greater confidence that KLA will outperform the wafer fabrication equipment market in 2027. By comparison, the bank says KLA’s equipment growth in 2026 was approximately 28%, below the industry’s growth rate of nearly 40%.
The bank raised its calendar 2027 revenue forecast from 21.4 billion dollars to 21.6 billion dollars and its adjusted earnings-per-share forecast from 6.77 dollars to 6.85 dollars. It also changed its system shipment growth assumption from 42% to 41% and raised its services growth forecast to 16%.
Morgan Stanley maintained its Overweight rating but lowered its target multiple from 28 times to 26 times and its price target from 227 dollars to 220 dollars because valuation multiples across the U.S. semiconductor equipment industry have broadly contracted. The new target is based on its calendar 2028 earnings-per-share forecast of 8.46 dollars.