Morningstar | KLA-Tencor Poised to Outperform Wafer Fab Equipment Peers in 2019; Shares Remain Undervalued
We are adding KLA-Tencor to the Best Ideas list as we remain positive on the wafer fabrication equipment market heading into 2019. Investments by major foundry and logic customers such as TSMC and Intel for their respective 7- and 10-nanometer-related process technologies will require more complex tools from KLA in process diagnostic and control, or PDC. Meanwhile, we believe domestic Chinese chipmakers typically do not possess the intellectual property and engineering talent found at cutting-edge chipmakers, implying that the capital intensity of PDC tools will be higher as domestic Chinese chipmakers must perform more troubleshooting and utilize more process control feedback loops to ramp their production to high volume. Wide-moat KLA's shares are trading at an attractive discount to our $128 fair value estimate.KLA-Tencor dominates the PDC segment of the semiconductor equipment industry. During the fabrication process, wafers must be inspected for defects and proper critical dimensions to identify and correct problem sources. As customers continue pursuing Moore's Law, smaller chips must meet more precise specifications, which increases the need for advanced PDC tools. These tools help customers improve semiconductor die yields, accelerate development and product ramps, and ultimately maximize profitability.
Overall, we expect inspection and metrology requirements to continue rising, which bodes well for PDC leader KLA. Historically, logic and foundry have ranged from 15% to 17% in PDC capital intensity, and with EUV lithography soon to be adopted, we think KLA will operate at the high end of this range, if not exceed it. Capital intensity in memory is also set to rise, particularly as cutting-edge 3D NAND technologies move from 64 layers to 96 layers, which we think KLA will be able to aggressively target over the coming years as dedicated tools come to market.
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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