ASML Holding vs. KLA Corp.: Which Semiconductor is a Better Buy?

NASDAQ: KLAC | KLA Corporation News, Ratings, and Charts

KLAC – The semiconductor industry is expected to grow significantly in the coming months, driven by higher global demand thanks to the continued advancement of technologies and rising government and private investments. The current, global semiconductor shortage has been driving prices up steeply, allowing companies such as KLA Corporation (KLAC) and ASML Holding (ASML) to boost their profits. But which stock is a better investment now? Read more to find out.

KLA Corporation (KLAC) is an international process control and yield management supplier for semiconductor and nanoelectronics companies. With a $45 billion-plus market capitalization, KLAC is a dominant player in the U.S. semiconductor industry. ASML Holding N.V (ASML) is a Netherlands-based semiconductor equipment manufacturer with sales concentrated in Europe, the United States and Asia.

The rising demand for semiconductors, given their application in almost every technology-oriented  industry, has grabbed investor attention in this space. Furthermore, with an adverse supply shock currently gripping global markets, semiconductor prices have been rising sharply, allowing manufacturing companies to generate hefty profits on roughly the same volume of sales. With budding industries, such as electric vehicles (EVs) and 5G, magnifying the demand for semiconductors, most manufacturing companies are taking steps to boost their production capacity through multiple new “fab” manufacturing factories. The Chips Act, which is a part of President Biden’s proposed $2 trillion in infrastructure spending, allocates approximately $50 billion to developing the domestic semiconductor infrastructure. 

These factors should allow the semiconductor industry to grow rapidly over the next few years to meet the high demand. As a result, ASML and KLAC should see a significant rise in the demand for their products.  ASML has gained 117.2% over the past year, while KLAC returned 77.8% over this period. In terms of year-to-date performance, ASML is the clear winner, with 30.3% returns versus KLAC’s 15% gains. ASML has gained 8.1% over the past three months, while KLAC declined 9.9% over this period.

Click here to checkout our Semiconductor Industry Report for 2021

But which stock is a better buy now? Let’s find out.

Latest Movements

KLAC has a long-standing partnership with Intel Corporation (INTC). On April 1, KLAC received the Intel 2020 Supplier Achievement award in technology. As one of  38 suppliers of INTC, KLAC has been recognized as the supplier’s preferred chip maker in 2018 and 2019. Thus, KLAC has immense goodwill in the semiconductor industry, and is known to be one of the top suppliers of products to chip makers worldwide.

ASML repurchased more than 300,000 shares in this month as part of its extensive buyback program, launched in January last year. Share buybacks should improve ASML’s earnings per share and ROE in the future.

Recent Financial Results

KLAC’s revenues increased 266.7% year-over-year to $1.80 billion in its  fiscal third quarter, ended March 31. Its EBT came in at $640.40 million, up 455.9% from the same period last year. Its net income improved 627.1% from its  year-ago value to $567.17 million. Its EPS stood at $3.66, representing a 632% rise from the prior-year quarter.

For the quarter ended April 4, 2021, ASML’s net sales came in at €4.36 billion ($5.30 billion), up 78.8% from the same period last year. Its income before taxes increased 272.9% year-over-year to €1.55 billion ($1.88 billion). Its net income and EPS improved 240.9% and 244.1%, respectively,  from the prior-year quarter to €1.33 billion ($1.62 billion) and €3.20 ($3.91).

Past and Expected Financial Performance

KLAC’s revenues and net income increased at CAGRs of 18.2% and 37.8% respectively, over the past three years. The company’s EPS improved at a 38.3% CAGR over this period.

In comparison,  ASML’s revenues rose at a 19.6% CAGR over the past three years, while its net income increased at a 28% CAGR over this period. Its EPS increased at a 28.9% CAGR  over the past three years.

Analysts expect KLAC’s EPS to rise 45.8% in the current quarter (ending June 2021), 35.7% in the current year, 20.2% next year, and at a rate of 17.1% per annum over the next five years. The company’s revenue is expected to rise 28.1% in the current  quarter, 18.2% in fiscal 2021, and 13.8% next year.

In comparison, the Street expects ASML’s EPS to increase 184.5% in the current quarter, 76.1% in the current year, 17.4% next year, and at a rate of 29.8% per annum over the next five years. Consensus revenue estimates indicate a 28.3% improvement in the current  quarter, a 52% rise in the current year, and a 14.5% improvement in 2022.

Profitability

ASML’s trailing-12-month revenue is 2.90 times KLAC’s. However, KLAC is more profitable, with a 59.38% gross profit margin, compared to ASML’s 50.61%. Also, KLAC’s levered free cash flow margin and ROE of 24.5% and 68.21%, respectively, are significantly higher than ASML’s 15.06% and 34.37%.

Thus, KLAC is a more profitable investment bet here.

Valuation

In terms of non-GAAP forward P/E, ASML is currently trading at 42x, 99.1% higher than KLAC, which is currently trading at 21.09x. ASML is also more expensive in terms of non-GAAP forward PEG (1.96x vs 1.31x) and trailing-12-month Price/Sales (11.78x vs 7.33x).

In addition, KLAC’s 21.57 trailing-12-month cash flow multiple compares with ASML’s 43.23.

Thus, KLAC is the more affordable stock.

POWR Ratings

KLAC has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. ASML has an overall C rating, translating to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

KLAC has an A grade for Quality. This is justified because  its trailing-12-month ROE of 68.48% is significantly higher than the 6.87% industry average. However, ASML has a C grade for Quality, owing to its lower-than-industry 0.63% asset turnover ratio.

KLAC has a C grade for Value, which is justified, given its slight overvaluation compared to industry peers. In comparison,  ASML has an F  grade  for Value. The company’s 42x non-GAAP forward P/E  is 72.3% higher than the 24.38x industry average, justifying its Value grade.

Of the 98 stocks in the B-rated Semiconductor & Wireless Chip industry, KLAC is ranked #32 and ASML is ranked #53. Beyond what we’ve stated above, we have graded both the stocks for Growth, Momentum, Stability and Sentiment. Click here to view KLAC’s Ratings. Get all ASML’s Ratings here.

The Winner

The Biden administration has been proposing steps to make the U.S. semiconductor industry independent, through hefty investments in domestic companies to boost their production capacity. KLAC is expected to benefit from the latest government policies. However, ASML might witness lower demand for its products in the U.S. markets. This, coupled with KLAC’s higher profitability and relative undervaluation, make it a better pick here.

Our research shows that odds of success increase if one bets on stocks with an overall POWR Rating of Strong Buy or Buy. Click here to view the top-rated stocks in the Semiconductor & Wireless Chip industry. 

Click here to checkout our Semiconductor Industry Report for 2021


KLAC shares were trading at $299.67 per share on Tuesday afternoon, up $1.95 (+0.65%). Year-to-date, KLAC has gained 16.41%, versus a 11.48% rise in the benchmark S&P 500 index during the same period.


About the Author: Aditi Ganguly


Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...


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