Buy KLA Corporation (KLAC)
June 2023
The Jensen Investment Team recently added KLA Corporation (ticker: KLAC) to its Quality Growth and Global Quality Growth Strategies. KLA Corporation is, in our assessment, one of the most essential semiconductor production equipment (“SPE”) manufacturers worldwide. The company makes highly differentiated machines needed in the process of manufacturing computer chips. More specifically, KLA is the leader in process control equipment, which ensures that crucial chip production steps are performed with the lowest error rate possible. KLA not only dominates the process control market with more than a 50% market share,1 but it has also gained market share over time. KLA’s process control segment accounts for up to 90%2 of the company’s revenues.
The SPE industry benefits from strong secular demand drivers. Computer chips are found in many more devices beyond traditional personal computers, such as mobile phones, data centers, cars, gaming consoles, and AI applications. The growing demand for more powerful computing also drives demand for more powerful and complex computer chips. Higher technological complexity opens the possibility for increased errors in chip production, necessitating more process control equipment, which benefits KLA.
As the global semiconductor process control leader, KLA is, in our opinion, protected by a wide economic moat. Major competitors have tried to enter the process control market but have experienced limited success. KLA prices its products to value, not cost, with gross margins reaching as high as 63% in 2022 and averaging 60% over the last 10 years.3 KLA’s long-tenured company leadership has consistently opted to return capital to investors through dividends and share buybacks. KLA’s business of servicing its installed machines, which accounts for more than 20% of revenues,4 has been the role model for the industry and, we believe, will continue to drive KLA’s growth and profitability.
KLA Corporation possesses many of the qualitative business aspects that we at Jensen seek to identify. These include high barriers to entry due to decades of accumulated knowledge, larger-than-peers’ R&D budgets in its chosen niche areas of focus, patents, and an established ecosystem of partner companies. Its competitive position is further cemented by high switching costs due to the risk of interrupting well-running chip production processes, the highly customized nature of the tools provided, and scale advantages.
Given KLA’s attractive fundamental business characteristics, its long-term history of shareholder value creation, and our valuation work that aims to identify long-term attractive investment opportunities, we are pleased to add the name to our portfolios.
1 KLA, “Letter to Shareholders: Q3 Fiscal 2023 Earnings,” Reported April 26, 2023, 2, https://d1io3yog0oux5.cloudfront.net/_c329adf93e8b359b5d63808461bf5a83/klatencor/db/1117/10477/letter_to_ shareholders/KLA_LetterToShareholders_04.26.2023_FINAL.pdf.
2 Ibid, 6.
3 “KLA Gross Margin 2010-2023 | KLAC,” Macrotrends, accessed June 15, 2023,
https://www.macrotrends.net/stocks/charts/KLAC/kla/gross-margin.
4 KLA, “Letter to Shareholders: Q3 Fiscal 2023 Earnings,” 10.
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Jensen Quality Growth Strategy Holdings
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The discussion of the specific security identified in this article is solely intended to illustrate the application of our investment approach. Our views expressed herein are subject to change and should not be construed as investment advice and are not designed or intended as a basis or determination for making any investment decision for any security. This information is current as of the date of this material and is subject to change at any time, based on the market and other conditions. Past performance is no guarantee of future results.
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