Morningstar | KLA-Tencor Offers an Alluring Avenue to Invest in Greater Technology Complexity in 2019 and Beyond
KLA-Tencor dominates the process diagnostic and control segment of the semiconductor equipment industry. During the fabrication process, wafers must be inspected for defects and proper critical dimensions to identify and rectify problem sources. As customers continue pursuing Moore's Law, smaller chips must meet more precise specifications, which in turn increase the need for advanced PDC tools. These tools help customers improve semiconductor die yields, accelerate development and product ramps, and ultimately maximize profitability.With a 50%-plus share in the PDC market and installed base of 20,000 tools, KLA-Tencor has built its leading technical expertise and extensive knowledge base into a wide economic moat. These competitive advantages have allowed the firm to maintain its technological edge through a large research and development budget and close relationships with customers to identify future needs in the PDC space.The firm is not immune to the cyclicality of the semiconductor equipment market and thus may face bouts of low capital expenditures due to prolonged process nodes and increased tool reuse. However, KLA has been able to charge a premium for its specialized products, as competitors' offerings are generally not as advanced. This allows the firm to handle cyclical troughs fairly well for a company that operates in the chip equipment industry.We believe KLA is well positioned for the long-term, as chipmakers will require more advanced PDC tools to go with fabrication technologies featuring smaller circuit sizes, new materials, and more process steps. For example, extreme ultra-violet lithography, which is being developed for process nodes 7-nanometer and below, will require new PDC tools to help validate and sustain the new technology. This endeavor will require a large research and development budget that only a firm such as KLA can provide.KLA is a supplier of process control and yield management solutions for the semiconductor and related nanoelectronics industries. The company provides process control and process-enabling solutions for manufacturing and testing wafers and reticles, integrated circuits, packaging, light emitting diodes, power devices, compound semiconductor devices, microelectromechanical systems, data storage, printed circuit boards (PCBs), and flat and flexible panel displays, as well as general materials research. The company has four reportable segments which include Semiconductor Process Control; Specialty Semiconductor Process; PCB, Display and Component Inspection; and Other.
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