AI Boom Lifts KLA and Applied Materials

December 15, 2025 at 19:42 UTC

7 min read

AI chip demand boosts KLA and Applied Materials with China export risks for 2026

Key Points

Jefferies upgraded KLA to Buy with a $1,500 target, sending shares higher
Applied Materials gained after Jefferies and Wells Fargo raised price targets
Both chip-gear makers are seen as key beneficiaries of AI-driven fab spending
Analysts highlight China export controls as a key risk to the 2026 outlook

Analyst upgrades put semiconductor equipment in focus

Semiconductor equipment makers KLA Corporation and Applied Materials moved into the spotlight on December 15 as Wall Street analysts raised ratings and price targets on expectations that artificial intelligence will drive a new wave of chip-factory investment into 2026 and 2027. KLA shares traded around $1,239 by midday, up roughly 3.8% after Jefferies upgraded the stock to Buy from Hold and lifted its price target to $1,500. Applied Materials stock traded near $262.60, up about 1.3%, after Wells Fargo and Jefferies each raised their targets, with Jefferies moving to $360 from $260 and reiterating a Buy rating. The calls come as investors debate how much AI-related wafer-fab and advanced-packaging spending can offset cyclical and regulatory headwinds, particularly tightening U.S. export controls on China.

Jefferies’ KLA call: AI complexity and leading-edge exposure

Jefferies’ upgrade of KLA centers on the view that AI will be a multi‑year driver for semiconductor capital equipment, with wafer-fab equipment spending expected to strengthen into calendar 2026 and 2027. The firm argues that AI chips are more complex than prior generations, increasing the need for process control and inspection tools, KLA’s core business. Jefferies highlighted KLA’s “outsized exposure” to leading-edge nodes and advanced packaging and said capacity additions tied to AI servers should begin in the second half of 2026 across foundry, memory, and packaging. The new $1,500 price target is based on a 30-times multiple of projected 2028 earnings per share of $50. Jefferies also raised its revenue forecasts for KLA to $14.0 billion for 2026 and $15.5 billion for 2027, above Street expectations, and described AI as its “favorite group” for 2026. Other coverage, including Barron’s and Nasdaq market wraps, noted KLA as a notable mover and placed it on lists of preferred chip stocks for the 2026 cycle.

KLA’s current fundamentals and market positioning

KLA’s latest reported results and guidance provide the backdrop for the bullish analyst stance. For its fiscal 2026 first quarter, ended September 30, 2025, the company reported revenue of $3.21 billion, GAAP diluted earnings per share of $8.47, and non‑GAAP diluted EPS of $8.81. Operating cash flow was $1.16 billion and free cash flow $1.07 billion, with $799.1 million returned to shareholders through dividends and buybacks in the quarter. KLA guided for second‑quarter fiscal 2026 revenue of $3.225 billion plus or minus $150 million, non‑GAAP gross margin of 62% plus or minus 1 percentage point, and non‑GAAP EPS of $8.70 plus or minus $0.78. Management has framed the “AI infrastructure buildout” as a profound shift in high‑performance computing, saying KLA is positioned to benefit across leading-edge foundry and logic, memory, and advanced packaging. The company also has a sizable repurchase authorization, with $4.47 billion remaining as of September 30, 2025, following a $5.0 billion increase earlier in 2025.

Valuation debate and risks around KLA’s AI-driven story

Despite the upbeat AI narrative, KLA’s valuation and risk profile are central to current market debate. MarketBeat data cited in the coverage show a consensus “Moderate Buy” rating, split between 13 Buy and 13 Hold recommendations, with an average 12‑month price target of about $1,273.62 and a range from $800 to $1,500. With the stock trading near $1,238–$1,239, the consensus implies only modest upside, in contrast to Jefferies’ roughly 21% upside case to $1,500. A Simply Wall St analysis described KLA as trading near record highs and estimated a model-based fair value around $1,287.27, while noting sensitivity to execution and geopolitical factors. KLA’s own disclosures highlight typical semiconductor-capex cyclicality and specific exposure to evolving U.S. Department of Commerce rules affecting sales and service in China. Jefferies’ model still assumes China will account for about 25% of KLA’s calendar 2026 revenue, underscoring the importance of export-control policy to the outlook.

Applied Materials: AI capex vs. China export controls

Applied Materials’ stock move on December 15 was driven by a similar AI‑focused thesis, but with a sharper emphasis on balancing growth opportunities against China-related risks. Wells Fargo raised its price target to $290 from $255, citing a clearer near‑term revenue bridge from longer-duration commitments even as some order metrics trend down. Jefferies raised its target to $360 from $260 and reiterated a Buy rating, arguing that AI should lift semiconductor capital spending across leading-edge logic, DRAM, and packaging, where Applied sells deposition, etch, inspection, and packaging‑adjacent tools. At the same time, Applied’s latest Form 10‑K shows China revenue fell to $8.529 billion, or 30% of fiscal 2025 net revenue, from $10.117 billion, or 37%, in fiscal 2024. Reuters has reported that the company expects a $600 million reduction in fiscal 2026 revenue tied to expanded U.S. export curbs on chip equipment to China, though stronger memory output linked to AI investments could partially offset the impact.

Applied Materials’ financial profile and 2026 setup

Applied Materials enters 2026 with record scale and a diversified revenue mix. For the fiscal year ended October 26, 2025, the company reported net revenue of $28.368 billion, up from $27.176 billion in 2024, gross margin of 48.7%, operating income of $8.289 billion, and GAAP diluted EPS of $8.66. Semiconductor Systems contributed $20.798 billion, or 73% of revenue, Applied Global Services $6.385 billion, or 23%, and Corporate and Other $1.185 billion, or 4%. In its November 13 report, Applied highlighted record annual revenue and EPS and guided for first‑quarter fiscal 2026 revenue of $6.85 billion plus or minus $0.5 billion and non‑GAAP EPS of $2.18 plus or minus $0.20. Management has indicated it is preparing for stronger demand beginning in the second half of calendar 2026, consistent with analyst expectations for a broader wafer‑fab equipment upcycle. The company also reported approximately $1.7 billion in remaining unsatisfied performance obligations on longer-duration contracts as of October 26, 2025, with about 53% expected to be recognized within 12 months, and noted that contract liabilities declined year over year.

Capital returns and industry outlook support bullish sentiment

Both KLA and Applied Materials are pairing AI‑linked growth narratives with substantial capital-return programs. KLA returned $799.1 million to shareholders in its latest quarter, including $254.0 million in dividends and $545.1 million in share repurchases, and retains $4.47 billion of authorized buyback capacity. Applied Materials announced a quarterly dividend of $0.46 per share payable March 12, 2026, and said it returned nearly $6.3 billion through dividends and repurchases in fiscal 2025, with about $14.0 billion remaining on its repurchase authorization at year‑end. At the industry level, Barron’s reported that UBS recently projected wafer‑fab equipment spending could grow more than 20% to $136.5 billion in 2026 and potentially reach $145 billion in 2027. That backdrop, combined with Jefferies’ and Wells Fargo’s higher targets and a generally positive analyst stance, underpins the view of KLA and Applied Materials as key ways to gain exposure to AI‑driven semiconductor investment ahead of the anticipated 2026–2027 spending ramp.

Key Takeaways

Analysts are increasingly treating KLA and Applied Materials as core beneficiaries of a multi‑year AI-driven wafer‑fab and packaging investment cycle.
Jefferies’ aggressive KLA target and Applied’s raised targets highlight a gap between bullish AI scenarios and more cautious consensus valuations.
China export controls and broader capex cyclicality remain central risks, even as both companies report strong recent results and maintain sizable buyback and dividend programs.