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KLA Corporation (KLAC +2%) is up mildly today after clearing its Q4 (Jun) earnings and revenue estimates, marking a long-awaited return to sequential and yr/yr growth. The semiconductor equipment supplier also issued mostly uplifting Q1 (Sep) guidance, with the midpoints of its adjusted EPS and sales targets above consensus. While KLAC tends to forecast quarterly numbers in-line with consensus, plenty of eyes were on its Q1 outlook after peers ASML (ASML) and NXP Semi (NXPI) raised a few red flags over the past few weeks, issuing bearish quarterly revenue forecasts due to pockets of weakness across certain end markets.

So why are shares of KLAC not moving significantly higher today? Aside from broader weakness across the market, KLAC ran up to all-time highs weeks before its Q4 report, surging by as much as +43% from April lows. This buying frenzy priced in much of the strength exhibited by KLAC in Q2.

However, it would not be shocking to find KLAC eventually moving back toward record highs. KLAC's recent sell-off was largely due to being caught in the crosshairs of risk-off activity triggered by sector rotation earlier this month rather than alarming cracks in end-market demand. Meanwhile, Q4 results and management's commentary illuminated that AI demand is only accelerating; KLAC hiked its CY24 annualized AI-related revenue estimate to over $500 mln from approximately $400 mln.

• KLAC's adjusted EPS beat was wider in Q4 compared to Q3 (Mar), supported by a return to positive yr/yr revenue growth of 9.1% to $2.57 bln. The company continued observing signs of a strengthening market environment. In foundry/logic, the ongoing incorporation of new technologies and the gradual acceleration of capital intensity remained a tailwind. Likewise, in memory, investments in AI and an improving supply/demand environment supported KLAC's solid Q4 numbers.
• Furthermore, on AI, KLAC did not waver from its excitement over the technology, noting that AI adoption is driving higher volume wafer manufacturing, more complex designs, and growing advanced packaging demands. Also, AI is aiding further differentiation among KLAC's product portfolio. Management anticipates the AI-induced tailwind alongside a broader recovery in end markets to only intensify from here, culminating in a significant growth year in 2025.
• While these tailwinds pick up momentum, the near-term market backdrop is still transitioning from stabilization. As such, KLAC kept its wafer fab equipment (WFE) outlook mostly unchanged, hovering in the mid-$90 bln range, with the back half of 2024 stronger than the front. The company also projected relatively conservative Q1 numbers, expecting adjusted EPS of $6.40-7.60 and revs of $2.60-2.90 bln.

The main takeaway from Q2 was that KLAC did not alter its upbeat tone over an eventual recovery come 2025. Even after alarms went off following quarterly results from ASML and NXPI, shares of KLAC held up decently, underpinning general optimism that KLAC was heading into greener pastures. While today's response is relatively muted, we see plenty of upside remaining for KLAC as long as no cracks form in AI.