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Baillie Gifford is well-known for making outsized returns on S&P 500 stocks such as Amazon, Tesla and Nvidia. More recently, it’s made an absolute fortune from SpaceX‘s record-breaking IPO.
Lat week, I noticed that the asset manager — which oversees FTSE 100 investment trust Scottish Mortgage — has been snapping up another S&P 500 stock that often flies under the radar. What growth opportunity does it see here?
A wide-moat business
The name is KLA Corp (NASDAQ:KLAC), a semiconductor equipment stock. Rather than making chips, KLA builds advanced equipment that foundries including TSMC, Samsung, and Intel use to identify microscopic flaws and ensure high manufacturing standards.
The company controls over 50% of the global semiconductor process control market. Once KLA’s inspection and metrology systems are integrated into customers’ manufacturing processes, replacing them isn’t straightforward. Therefore, the firm’s moat is based around best-in-class technical know-how, established customer relationships, and high switching costs.
As chips become larger, more expensive and more complex, particularly as more chips are stacked and packaged together, a single defect can destroy far more value. That makes inspection increasingly important.
Baillie Gifford
Growth market
Given KLA’s entrenched competitive position, the stock’s essentially a play on the growth of the overall semiconductor industry. This is only set to expand over time, driven by more chip manufacturing for electric vehicles, data centres, humanoid robots, and electronics. And more fabs will mean more semiconductor equipment.
Recently, the chip diagnostics firm raised its total addressable market to the low-$150bn range, up from $135bn-$140bn in March. For context, KLA reported revenue of $13.6bn for its latest fiscal year ended 30 June.
By 2030, the company’s aiming for $26bn in revenue (an almost doubling) and an operating margin as high as 47% (up from around 43% today).
KLA remains uniquely positioned on the critical path of AI infrastructure expansion, where the increasing number and sophistication of leading-edge designs across foundry/logic and the rising complexity and performance specifications in memory are driving greater demand for process control.
KLA CEO Rick Wallace
Is the stock pricey?
Stepping back then, we have a world-class business with strong competitive advantages operating in a growth market. But what about valuation?
At $167, the stock’s much cheaper than it was at the end of June, when it reached at $301. The forward price-to-earnings (P/E) ratio is currently 31.
Admittedly, this is higher than KLA’s historical average and a premium to the wider S&P 500. If growth disappoints — say because the AI infrastructure buildout suddenly slows — the stock could fall much lower.
Is there a potential buying opportunity?
JP Morgan recently named KLA as its top US chip equipment stock. It sees the global wafer fabrication equipment market growing at a compound annual growth rate of 28% through to 2028.
Note that Dutch tech company ASML‘s High-NA EUV lithography machines, which are essential to make the most advanced AI chips, are now being installed. But because they print smaller features on chips, there’s also the potential for smaller defects that need detecting with KLA’s machines.
With the firm’s backlog now at a record $12.5bn, and the AI infrastructure buildout accelerating, the growth prospects look very promising. I think the stock’s an AI-related idea worth taking seriously after the 44% crash.
Should you invest £5,000 in KLA right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if KLA made the list?
Ben McPoland owns shares in Nvidia, Scottish Mortgage and SpaceX.
This story originally appeared on Motley Fool
