KLA CORP (KLAC) stock intrinsic value fair value estimate & owner earnings analysis

KLA makes the inspection and measurement systems chipmakers use to find defects on wafers while they are being built, and sells the service contracts that keep those tools running. Roughly 23% of fiscal 2026 revenue ($3.1 billion of $13.6 billion) is service, which has grown every year since fiscal 2021 ($1.68 billion to $3.13 billion), including through the fiscal 2024 equipment dip. All per-share figures reflect the ten-for-one split of June 2026. Our earlier estimates were built on a different footing and are not comparable. Earnings base. We measure what the business earns for its owners as cash from operations, less the capital spending needed just to stay in business, less stock compensation, and ignoring the swings in receivables, inventory and other working capital that make cash flow lurch from year to year. On that basis, owner earnings per share rose from $0.61 in fiscal 2017 to $3.77 in fiscal 2026 (+20% in the latest year, $3.13 the year before). Fiscal 2026 cash from operations was flat at $4.1 billion; about $1.5 billion went into receivables ($642 million), inventory ($466 million) and other assets ($501 million) as AI-driven orders built, and we do not count that as a cost of staying in business. Amortization of purchased intangibles and the fiscal 2025 $239 million write-down of acquired assets are non-cash and are added back; the remaining purchased intangibles are down to $256 million, so this tail is small. Because this is a cyclical business, we anchor on the median of the last five years, about $2.43 per share before interest, rather than on the two record years. Interest is added back so the business can be valued first and its $5.95 billion of debt subtracted afterwards. Base case, about $49.73. Fiscal 2026 growth was +19% on this basis; we assume +15% in the first year, to about $2.79, because orders in backlog rose from $7.86 billion to $12.57 billion over fiscal 2026 and cover that step. We then cut about 5% for China: the U.S. 'Affiliates Rule' on export licensing is only suspended until November 2026, and China fell from 42.8% of sales in fiscal 2024 to 29.8% in fiscal 2026. After that we credit 2% a year for ten years, well below the service business's 10% to 16% record, because service is only about a quarter of sales. We assume earnings then hold flat, supported by the R&D engine ($1.53 billion in fiscal 2026) that has kept KLA the leader in this niche. Not credited: further AI-driven demand, share gains, new products or margin gains. Business worth about $67 billion; net debt $1.3 billion; shares worth about $66 billion, or $49.73. Bear case, about $27.14. This case repeats the 2009 downturn, when KLA's revenue fell 40% in one year (from $2.52 billion to $1.52 billion). Applied to KLA's fiscal 2024 cost structure, with research spending largely protected, cash flow before interest falls from about $3.2 billion to about $1.06 billion ($0.80 per share) in the trough year, then recovers over three years. It does not return to the old level, because we also assume most of the sales to China are lost to tighter export controls. Earnings settle near $1.75 per share. Business worth about $37 billion; net debt $1.3 billion; shares worth about $36 billion, or $27.14. Even at the trough, business cash flow covers annual interest of about $273 million almost four times. Bull case, about $83.29. Backlog supports keeping the fiscal 2026 level of about $3.98 per share, with service growing 3.5% a year (below its record) for ten years, then flat. Business worth about $111 billion; net debt $1.3 billion; shares worth about $110 billion, or $83.29. Debt. KLA owes $5.95 billion in fixed-rate senior notes due between March 2029 ($750 million, 4.1%) and 2062, averaging about 4.6%. Cheap long-term borrowing reduces what the debt is worth by about $0.7 billion. Cash and securities total $4.9 billion; we keep $1.0 billion for operations. No maturity looms before 2029. Margin-of-safety price. Our confidence in the earnings level is moderate: the five-year median sits below the last two years, but equipment spending is highly cyclical, with 40% revenue falls in 2009. The worst plausible outcomes include a Taiwan disruption (26.8% of sales and the fabs of its largest customers) or a sharp turn in export rules, neither modeled. The balance sheet would survive either: net debt is small and there is no refinancing pressure. Being wrong about the China loss or the level of recurring earnings moves value a lot; if earnings fade 3% a year after year ten instead of holding flat, the base case would be about $39. The price assumes a holding period of up to five years, during which the company paid a $0.92 annual dividend plus $2.3 billion of buybacks in fiscal 2026. From $22 a share, the base case implies roughly 25% a year over five years including cash returned, and the bear case implies about 10% a year. The margin-of-safety price is $22.