Episode Details

KLA Corporation (KLAC) Q4 FY2026 — KLA Corporation (KLAC), the dominant supplier of semiconductor process-control (inspection and metrology) equipment with roughly 58% market share, reported fiscal Q4 2026 (quarter ended June 30, 2026) after the close on July 28. Revenue was a record $3.658B, +15.2% YoY and above the midpoint of guidance; non-GAAP EPS of $1.05 beat the ~$1.02 consensus; non-GAAP gross margin of 62.4% landed at the upper end of guidance. GAAP net income was $1.363B and GAAP diluted EPS $1.04 — the low per-share figure reflects the 10-for-1 stock split effected June 11, 2026 (1.315B diluted shares). FY26: revenue $13.579B (+11.7%), GAAP net income $4.831B (+18.9%), non-GAAP EPS $3.76. Guidance for Q1 FY27 was $4.0B +/- $200M (about +25% YoY, above the ~$3.92B consensus) with non-GAAP EPS of $1.16, and management raised its calendar-2026 wafer-equipment market view to the low $150B range from $140B+. Yet the stock fell ~9% after the print, on top of a 6.2% decline that session — about 42% below its June 30 closing high of $301.71. Two under-covered facts explain the reaction. First, wafer inspection — KLA's highest-margin, highest-share franchise — grew just 1% YoY and fell from ~56% to 49% of revenue; growth came from lower-margin patterning (+61%), PCB and component inspection systems (+96%) and services (+17%), which is why non-GAAP gross margin actually declined from 63.2% to 62.4% on 15% more revenue, and why September gross margin is guided flat at 62.5% on ~10% more revenue. Second, cash conversion deteriorated: FY26 free cash flow was $3.767B versus $3.747B — flat — while net income rose 19%, so FCF/net income fell to 78% from 92% in FY25 and 110% in FY24; Q4 FCF fell 23% YoY to $817M as receivables consumed $586M in the quarter and ended the year +28% against 15% revenue growth. KLA still returned $3.348B (89% of FCF) via buybacks and its 17th straight dividend increase. China was 26% of revenue. Our owner-earnings DCF on a ~$4.7B base, weighted 70% to the AI-secular path at a 9% discount rate, lands fair value near $110 versus ~$174 — about 37% below the price. Our call: HOLD, 2/5 — an A+ franchise whose 2030 plan is already in the price. Wall Street is at Buy (28 buy / 14 hold / 2 sell) with a ~$229 average target implying +32%, so we DIFFER and are materially more cautious. KLA Corporation (KLAC) just did something unusual: it printed the best quarter in its history, beat on earnings, guided above consensus, raised its forecast for the entire wafer-equipment market — and the stock fell anyway, leaving it about 42% below its June high. KLA is the near-monopoly of semiconductor process control, the inspection and metrology step that catches defects while chips are being built; it holds roughly 58% of that market and earns like it, with 62%+ gross margins, 42%+ operating margins and a return on equity near 76%. Fiscal Q4 2026 (ended June 30): revenue a record $3.658B (+15.2% YoY), non-GAAP EPS $1.05 versus ~$1.02 expected, non-GAAP gross margin 62.4% at the top of guidance, GAAP net income $1.363B. Full year: revenue $13.579B, GAAP net income $4.831B (+18.9%), non-GAAP EPS $3.76. September guidance is $4.0B +/- $200M, roughly +25% YoY and above the Street, with the calendar-2026 wafer-equipment market raised to the low $150B range from $140B+, backlog around $12.5B, and advanced-packaging process-control revenue guided to about $1.1B in 2026, up more than 70%. So why did it sell off? Two things the coverage largely skipped. First, the mix: wafer inspection — the crown-jewel franchise where KLA's share and pricing power are greatest — grew only 1% year over year and slipped from about 56% to 49% of revenue. The 15% growth came from structurally lower-margin lines: patterning +61%, PCB and component inspection systems +96%, services +17%. That is precisely why non-GAAP gross margin went down, from 63.2% to 62.4%, on 15% more revenue — and why September margin is guided flat at 62.5% despite roughly 10% mor