Citi: Improved supply unlocks AI equipment demand for KLA; Citi raises forecasts but cuts price target

How is improved supply changing growth?

Citi said KLA reported results and guidance above expectations: additional supply came online, helping the company meet strong AI-related demand and accelerating growth in the second half of 2026.
Management expects continued sequential growth over the next few quarters as supply constraints ease; growth in 2027 will be steadier than the step-up in the second half of 2026.
Customers remain eager to receive equipment. The company said it could have shipped more systems with sufficient supply, but did not quantify the constraint. Citi remains concerned about tight supply chains across the industry.

KLA management expects global wafer fab equipment spending of about $150 billion to $160 billion in 2026 and more than $200 billion in 2027. Demand is strong across advanced-node foundry and logic chips, DRAM and advanced packaging, while backlog and business visibility continue to improve.
The company is confident it can outperform the wafer fab equipment market in 2027, citing advanced-node investment, greater process-control equipment demand intensity in DRAM manufacturing, advanced packaging expansion and improved supply capacity.
Management expects memory customers to account for about 40% of KLA's semiconductor process-control systems revenue in 2027, up from about 38% in 2026, with foundry and logic customers accounting for about 60%. This mix reflects KLA's own customers and excludes packaging, wafer and mask customers. A higher memory share previously weighed on relative performance; the company believes greater DRAM process-control demand intensity has now changed that relationship.

Customers are working through previously accumulated bare-wafer inspection inventory, equipment utilization is already high, and the company is beginning to see order activity for future deliveries. It expects the market to recover next year; the business remains primarily service-driven for now.
As equipment shipments rise, the installed base is expanding, and service contract attachment rates remain very high. Based on its current equipment forecast, management expects service growth could exceed the level in the company's target model.
High-density PCBs for next-generation GPUs are more complex, have more layers and face heat-dissipation challenges, prompting customers to upgrade PCB equipment. The company believes the related business could grow slightly faster than the overall semiconductor process-control business next year, although PCB currently represents only a small part of KLA's revenue.

Citi raised its calendar-year forecasts for 2026, 2027 and 2028 by 3%, 6% and 4%, respectively, but lowered its price target from $290 to $275 and maintained its Buy rating. The bank reduced its valuation price-to-earnings multiple from about 38 times to about 35 times to reflect lower market valuation multiples.
Costs are also rising: the company expects operating expenses to increase by about $30 million to $40 million per quarter going into 2027, roughly twice the previously discussed $15 million to $20 million per quarter. Reasons include staff expansion, compensation pressure on service and applications personnel in some regions, and depreciation from capital spending across locations.