Insights
KLA: a quality stock benefitting from the semiconductor boom
11th August 2026
Semiconductor stocks are not typical hunting grounds for quality managers.
The main problem is their cyclicality – a boom-and-bust tendency that makes it difficult to find businesses capable of delivering the consistent, compounding growth quality investors seek.
But not every company exposed to semiconductors is cyclical. Those supplying the critical tools that chipmakers rely on tend to enjoy more durable demand.
ASML, whose extreme ultraviolet lithography machines are essential for producing leading-edge chips, is a good example. A lesser-known one is KLA.
Based in California, KLA sells leading-edge equipment to semiconductor manufacturers including Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung.
The manufacturing challenge these companies face is extreme: chips are built through hundreds of process steps, often over months in tightly controlled manufacturing environments, and even microscopic defects can render them unusable.
As chips become more powerful and complex, avoiding these defects through so-called process control becomes increasingly important. Commanding around 58% of the global process control market – roughly seven times the share of its nearest competitor – KLA is by far the global leader in this space.
KLA’s tools help fabrication plants (fabs) see, measure and correct microscopic defects before they reduce production yields.
Attractive business model
KLA operates a hybrid model: high-value systems sales plus recurring services.
Systems revenue is cyclical because it follows customer capex and technology transitions. However, KLA's business has become increasingly resilient thanks to its growing service operation.
Once installed, its machines can require decades of maintenance, upgrades, spare parts and software support. Such services accounted for around 22% of revenue last year, providing a resilient revenue stream that often recoups 100% of the tool's purchase price over its 20 to 30-year lifespan.
KLA’s market dominance and pricing power is reflected in its profitability – in 2025, it reported a full-year gross margin of 60.9%, significantly higher than peers .
As a low capex business, KLA is also more cash-generative than many hardware rivals, and it has committed to returning at least 90% of its free cash flow to shareholders in the form of dividends and share buybacks. It has raised its annual dividend for 17 consecutive years and has authorised a new $7bn share repurchase plan, illustrating its commitment to shareholder returns.
Importantly, KLA has highly sticky relationships with customers. As manufacturing costs continue to explode, chipmakers cannot afford prolonged troubleshooting periods or production delays. KLA’s process control effectively becomes a yield insurance policy. It can provide predictive insights before yield disasters happen, reduce time-to-ramp on new generations of chip technology, and stabilise production at volume.
Once installed, KLA's tools become deeply embedded in customers' manufacturing processes, making them difficult and costly to replace. This deep integration gives KLA an integral role in customers' manufacturing strategies, while its scale allows it to strongly reinvest in R&D, helping it deliver on client needs.
This combination of scale, data and customer integration creates a durable barrier to entry.
A growing industry
Capex expectations for the semiconductor industry are rising, and we believe this investment cycle is likely to remain stronger for longer. As semiconductor companies become more profitable, they are investing more in wafer fab equipment to support higher production volumes – a key tailwind for KLA.
This is being reinforced by the profitability of memory chipmakers including Samsung, Micron and SK Hynix, which are investing heavily in capacity to meet AI-driven memory demand. While there is risk that these elevated profits moderate as supply increases to address demand and pricing normalises, KLA's growth is driven by semiconductor manufacturing volumes rather than memory prices. As a critical supplier of process control equipment, we believe its pricing power should prove more durable across the cycle.
At the same time, we believe the market continues to underestimate the long-term opportunity created by increasing semiconductor complexity. As chipmakers adopt more advanced manufacturing technologies, demand for KLA's process control solutions should continue to outpace overall semiconductor industry growth.
In the short term, a key risk is KLA's ability to meet the sheer scale of demand. However, the company has been investing in its supply chain to expand capacity. Moreover, much of its supply base is ‘captive’, limiting the risk of capacity being diverted to competitors.
Earlier this year, management outlined a 2030 earnings-per-share model that implies earnings growth of more than 20% per annum. KLA’s organic growth is supported by a growing installed base of tools which should help expand recurring service revenues.
KLA's leadership position has been reinforced by a long-tenured management team, led by Chief Executive Officer Rick Wallace, which has successfully navigated multiple semiconductor cycles.
KLA’s strategic competitive edge is reflected in its Return on Invested Capital (ROIC) of 44% in 2025, and its balance sheet is strong with only a small net debt position.
Semiconductor demand, while booming, is likely to remain cyclical – even if that cycle, fuelled by AI capex, turns out to be longer than typical. However, as chips become increasingly complex, the need to inspect, measure and optimise their production should only grow, in a market that is becoming significantly larger.
KLA holds a strong position in this important segment of the manufacturing process and benefits from a number of competitive strengths, alongside favourable long-term growth prospects. These characteristics support the investment case for investors focused on quality growth companies.
Disclaimer
This information is only intended for use in jurisdictions where its distribution or availability is consistent with local laws or regulations.
Any views expressed are opinions as of the date of publication and may change without notice. The perspectives expressed reflect the views of the author or relevant investment team.
This communication has been prepared for information only and is not intended for onward distribution. The information, data, analyses or opinions contained herein do not constitute investment advice, are provided as of the date written, are provided solely for informational purposes and is not an offer to buy or sell a security. The company referenced is discussed solely as an underlying investment held within our global equities strategy. Forecasts, estimates and forward-looking statements are inherently uncertain and should not be relied upon as indicators of future results. Information is obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed.
Stonehage Fleming is now part of the Corient group of companies. Corient refers to affiliated entities under common control of Corient Global HoldCo Limited.
Issued by Corient Investment Management Limited, authorised and regulated by the Financial Conduct Authority (FRN. 194382).
