KLA Corp raised to Buy, Morgan Stanley sees 'rich catalyst path'

Investing.com -- Morgan Stanley upgraded KLA Corp to Overweight from Equal-weight on Monday, raising its price target for the stock to $870 from $748, citing expectations that the company will outgrow wafer fabrication equipment (WFE) in 2025-2026.

“We model KLA’s revenue to grow 8%/12% in 2025-2026, ahead of our wafer fabrication equipment (WFE) forecast of -3%/+4%,” Morgan Stanley (NYSE:MS) analysts wrote. 

The firm attributes this to two key drivers: rising process control intensity due to larger die sizes and increased design starts, and market share gains as KLA continues to lead in process control technology.

Morgan Stanley also raised its valuation multiple for KLA, arguing that the company’s superior gross margin justifies a premium over peers. 

“We increase our target multiple from 21x to 24x, which on our new CY26 EPS estimate of $36.25 brings up our PT to $870 (29% upside),” analysts said. 

KLA’s CY26 gross margin estimate of 62% is said to support the case for a higher valuation compared to LAM Research and Applied Materials (NASDAQ:AMAT).

Morgan Stanley sees a "rich catalyst path" that could drive a re-rating, including the upcoming March quarter earnings report in late April and the 2025 Investor Day on June 18. 

“KLA should be able to guide JunQ revenue of flat q/q or better, with TSMC strength offsetting China weakness,” analysts noted.

However, risks remain. Morgan Stanley highlights overall WFE weakness as the biggest concern, along with China export restrictions that could further impact revenue. 

“KLA has guided for a $500mn impact from the Dec 2024 export restrictions, and we model for a 28% y/y decline in 2025 China revenue,” the firm wrote.