Is There A Risk Hiding In KLA Stock’s Record Quarter?

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KLA (KLAC) reported record revenue of $4.14 billion for its September 2026 quarter, its fiscal Q1 2027, up 28.9% from a year earlier. Its reported gross margin, the share of sales left after the cost of what it sells, was 61.9%, compared with 61.3% a year before. For a holder, that margin is the one number in an otherwise strong quarter that deserves a closer look. So why is KLA keeping barely more of each sales dollar while its sales surge?

KLA Faces Persistently High Memory Costs

On the October 28 earnings call, management said persistently high costs for the memory its systems need for image processing are offsetting the gains KLA is making as it grows. When asked about gross margin, management said some cost inputs have been challenging and that the memory environment will continue to be challenging. KLA cannot quickly pass that cost on either: on its process control business, management said it is very difficult to raise prices on deals already in place and on existing backlog.

The worry is mild when set against KLA’s own past. The margin is not falling: over the twelve months to September 2026 it was 61.5%, above the 60.8% average of the last three twelve-month periods, this one included. Yet it has barely climbed with sales: across the five quarters to September 2026 it ranged only from 61.1% to 61.9%.

When Does KLA Expect To Reach Its Margin Target?

Management expects that from the middle to the back half of 2027 into 2028, KLA’s gross margin will be in line with the target range of 63% to 64% set at its Investor Day, though it said it does not know exactly when the improvement will start. On management’s own measure, the September quarter’s adjusted gross margin was 62.7%. Its guide for the December quarter, fiscal Q2 2027, is 62.5%, plus or minus 1 percentage point.

To close the gap between that guide and the target, management is working to make its systems use memory more efficiently, alongside other product cost cuts, and said that together with its usual value sharing with customers this should offset the cost over time. For scale, each percentage point of gross margin on the $14.5 billion of revenue KLA reported over the last twelve months comes to about $145 million of gross profit a year.

Is KLA Stock Still Priced For Fast Growth?

KLA stock still trades at 38.0 times its earnings over the last twelve months, compared with 22.3 times for the S&P 500. That valuation comes after a 26.5% fall in the three months to November 10, when the index lost 2.7%. A price that high likely assumes KLA keeps growing quickly and keeps more of that growth as profit, so a gross margin that does not climb matters more to this stock than to a cheaper one.

Still, KLA’s growth is reaching its profit further down the income statement. Its operating margin was 45.0% in the September quarter, up from 41.7% a year earlier. Management guided December quarter revenue of $4.7 billion, plus or minus $200 million, and said its backlog continues to grow.

That makes KLA’s gross margin a modest worry for a holder rather than an alarm, because management expects to offset the memory cost over time, though it expects the margin to reach its target only from the middle of 2027 into 2028. KLA is expected to report its December quarter in January 2027, and its adjusted gross margin against the December guide, along with what management says about memory costs, is the number to watch.

Does This Mean You Should Act On KLAC?

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