– By GF Value
The stock of KLA (NAS:KLAC, 30-year Financials) appears to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $347.29 per share and the market cap of $53.5 billion, KLA stock shows every sign of being significantly overvalued. GF Value for KLA is shown in the chart below.
Because KLA is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 18.5% over the past three years and is estimated to grow 9.17% annually over the next three to five years.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. KLA has a cash-to-debt ratio of 0.64, which is worse than 70% of the companies in Semiconductors industry. GuruFocus ranks the overall financial strength of KLA at 5 out of 10, which indicates that the financial strength of KLA is fair. This is the debt and cash of KLA over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. KLA has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $6.1 billion and earnings of $8.76 a share. Its operating margin of 32.64% better than 95% of the companies in Semiconductors industry. Overall, GuruFocus ranks KLA’s profitability as strong. This is the revenue and net income of KLA over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus’ research has found that growth is closely correlated with the long-term performance of a company’s stock. If a company’s business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company’s revenue and earnings are declining, the value of the company will decrease. KLA’s 3-year average revenue growth rate is better than 84% of the companies in Semiconductors industry. KLA’s 3-year average EBITDA growth rate is 10.4%, which ranks in the middle range of the companies in Semiconductors industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, KLA’s return on invested capital is 25.79, and its cost of capital is 9.53. The historical ROIC vs WACC comparison of KLA is shown below:
In conclusion, The stock of KLA (NAS:KLAC, 30-year Financials) is estimated to be significantly overvalued. The company’s financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Semiconductors industry. To learn more about KLA stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.