$KLAC · Everything Money · 2026-10-28

Now, guys , the second arrow is KLA. It manufactures specialized machines that inspect computer chips for microscopic defects during manufacturing. The beautiful part is that it doesn't need to win any chipmaker on its own.

It profits whenever the industry ever builds advanced chips, regardless of who makes them. Therefore, the optimistic expectation is that chips will become more complex, making their testing tools more valuable and important.

In addition, it earns a steady income from its maintenance for years. The pessimistic outlook is that spending on chip equipment is famously cyclical . Around 30% of its sales come from China, which carries enormous political risks.

But its technology is so specialized that competitors cannot easily copy it.

Okay, guys, it's a company with a market capitalization of $195 billion and an enterprise value of $201 billion. Therefore, although the value of the institution is higher than the market value, the difference is only $5 billion.

And you know what? They generate $3 to $4 billion annually in free cash flow. They can easily bear this debt . So, it's still an acceptable mark for me in terms of debt.

Next, huge returns on capital, higher than Arista. 40% annually for the past five years , and 37.5% for last year. Also, like Arista, profit margins are increasing. 10 years at 30.5%, 5 years at 33 and a third, 1 year at 35.5%.

And guys, they're growing their revenue with no acquisitions—or very few acquisitions. Only $435 million has been spent in the past five years in total on net acquisitions. This is impressive.

Good. Essentially, like Arista, except they buy back shares, which might not be a good thing. Do you know why? They are selling at 51 times free cash flow. That's a high number.

Now, you should repurchase the shares if you believe your stock is undervalued . This may be undervalued, but I don't see the kind of growth in profit, and I mean , look at this.

Their free cash flow last year was 3.8 billion. Their five-year average is 3.4. He hasn't grown much over the past five years . So, this may not be the best metric, but of course, we also have a high five- year price-to-earnings ratio and a high five-year free cash flow rate. Everything else is an acceptable sign.

Well, they have earnings growing from 5.48 per share to 10.15, which means almost doubling over the next four years . This represents an annual growth of approximately 16 to 18%.

Not bad, guys. It's still a high rate, but again, is the bonus worth it? And as for revenue, look at this. 18 billion grows to reach 32 billion. This means growth of approximately 70% over the next four years.

So guys, there's still plenty of growth in revenue and profits. They may be right to repurchase those shares.

Okay, guys. Here are my 10- year assumptions for KLA. I used the " Help me set the defaults" button again. It achieved revenue growth of 8.25%, 11% and 13.75%. Profit margins of 23%, 30.68% and 38.35% were used.

I have placed some positive possibilities on the upside, but I am more conservative and assume that the 10-year average will return to normal. The same applies to free cash flow.

One thing I want to point out, folks, is that free cash flow and profit margin have changed dramatically in the last five years . But in the last ten years, they have been very close.

Next, the price-to-earnings and free cash flow multiples are 15, 20, and 25. And again, a return of 9.5%. There is no margin of safety. I pressed the analyze button, and these are my results. 50 on the low side, 180 to 190 on the high side, and about 100 on average.

So, once again, a company that does n't meet my numbers here, but it could be that AI hype is really driving up prices.