KLA Corporation (KLAC) designs, manufactures and markets process control and yield management solutions for the semiconductor and related nanoelectronics industries worldwide.
The company recently announced a new $6-billion Share Repurchase Authorization, including approximately $3 billion Accelerated Share Repurchase (ASR) to be completed over the next 3-6 months. The remaining amount will be repurchased over the next 12-18 months, subject to market conditions. This shows the company’s stable cash flow generating capabilities.
On the other hand, STMicroelectronics N.V. (STM) designs, develops, manufactures, and sells semiconductor products in Europe, the Middle East, Africa, the Americas, and the Asia Pacific. The company has taken several other strategic initiatives to boost its performance over the past few months.
The increasing consumption of consumer electronics and the emerging usage of Artificial Intelligence (AI) is expected to boost the semiconductor market's growth. Also, accelerating demand for faster and advanced memory chips will drive the industry’s performance. The semiconductor market is projected to reach $893.1 billion in 2029, growing at a CAGR of 9.2%. Therefore, both KLAC and STM should benefit.
KLAC has slumped 3.3% in price over the past month, while STM is down 15.2%. Moreover, KLAC’s 5.1% returns over the past year compare with STM’s 9% decline.
But which stock is a better buy now? Let's find out.
Latest Developments
KLAC recently announced that it commenced a tender offer to purchase up to $500,000,000 aggregate principal amount for cash, which may be increased or decreased by KLAC, of its 4.650% Senior Notes due 2024. KLAC aims to fund the purchase of Tender Notes accepted for payment in the Tender Offer with a portion of the proceeds from a concurrent offering of senior notes.
Recently STM announced that it is enhancing the sustainability of personal computing with its latest innovation. The new chip, ST-ONE, aims to increase energy efficiency in various ac-dc adapters, fully compliant with USB-PD 3.1, including laptop and smartphone chargers. New adapters built with ST-ONE can reduce CO2 emissions and the quantity of plastics consumed.
This month, STM has introduced new inertial sensors that contain the intelligent sensor processing unit (ISPU) to power the onlife era: interacting with trained devices with intelligence moving from “on” the edge to “in” the edge. The ISM330ISN always-on 6-axis inertial measurement unit (IMU) for movement and position sensing uses its intelligence to deliver extraordinary performance and accuracy for its size and power.
Recent Financial Results
KLAC's total revenue increased 26.9% year-over-year to $2.23 billion during the third quarter ending March 31, 2021. The non-GAAP net income attributable to KLAC grew 29.7% from its year-ago value to $775.64 million, while its non-GAAP EPS improved 33.2% from its prior-year quarter to $5.13.
However, its cash and cash equivalent declined 1.4% from its prior period to $1.42 billion for nine months ending March 31, 2022. Its net cash used in investing activities increased 222.5% year-over-year to $569.49 million.
In the first quarter ending April 2, 2022, STM's net revenues increased 17.7% year-over-year to $3.55 billion. Its operating income grew 99.5% from its year-ago value to $877.00 million, while its net income improved 105.1% from its prior-year quarter to $747.00 million. The company's EPS amounted to $0.79, up 102.6% year-over-year.
Past and Expected Financial Performance
KLAC's revenue and EPS grew at a CAGR of 25.5% and 34.9%, respectively, over the past three years. Analysts expect KLAC's revenue to increase 26.1% in the current quarter,32.2% in the current year, and 12.8% next year. The company's EPS is expected to grow 24.2% in the current quarter, 43.8% in the current year, and 14.8% next year. Moreover, its EPS is expected to grow at a rate of 20.2% per annum over the next five years.
On the other hand, STM's revenue and EPS grew at a CAGR of 11.8% and 13.8%, respectively, over the past three years. Analysts expect the company's revenue to increase 22.3% in the next quarter, 19.1% in the current year, and 6.7% next year. The company's EPS is expected to grow 79.5% in the current quarter, 52.8% in the current year, and 8.2% next year. Moreover, STM's EPS is expected to grow at a rate of 5% per annum over the next five years.
Profitability
STM's trailing-12-month revenue is 1.54 times what KLAC generates. However, KLAC has a gross profit margin of 60.86% compared to STM’s 43.64%. KLAC’s 36.4% net income margin compares to STM's 17.9%.
Furthermore, KLAC’s ROE, ROA and ROTC of 87.6%, 19.34% and 29.23% compare with STM’s 25.9%, 11.3% and 14.5%, respectively.
Thus, KLAC is more profitable.
Valuation
In terms of forward EV/Sales, KLAC is currently trading at 5.23x, 164.1% higher than STM, which is currently trading at 1.98x. Moreover, KLAC’s forward EV/EBITDA ratio of 11.41x is 85.8% higher than STM's 6.14x.
POWR Ratings
STM has an overall rating of A, which equates to Strong Buy in our proprietary POWR Ratings system. KLAC, on the other hand, has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
STM has a grade of B for Value, in sync with the company's lower valuation. KLAC has a D grade for Value. This is justified given the stock’s higher valuation.
STM has a grade of B for Growth, consistent with its stable rise in financials over the past couple of years. In contrast, KLAC has a Growth grade of C.
Of the 96 stocks in the B-rated the B-rated Semiconductor & Wireless Chip industry, STM is ranked #5 while KLAC is ranked #55.
Beyond what we've stated above, we have also rated both the stocks for Quality, Momentum, and Stability. Click here to view STM ratings. Get all KLAC ratings here.
The Winner
Factors such as rising consumption of consumer electronics and continued digitization will boost the semiconductor market’s growth. Therefore, KLAC and STM are expected to grow substantially. However, STM's relatively lower valuation, various enhancements in its product and services, and robust financials make it a better investment now.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Semiconductor & Wireless Chip industry here.
KLAC shares were trading at $324.51 per share on Thursday morning, up $0.07 (+0.02%). Year-to-date, KLAC has declined -24.10%, versus a -19.93% rise in the benchmark S&P 500 index during the same period.
About the Author: Spandan Khandelwal
Spandan's is a financial journalist and investment analyst focused on the stock market. With her ability to interpret financial data, she aims to help investors evaluate the fundamentals of a company before investing.
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