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Why KLA Stock Rose 15.3% in July

By Billy Duberstein – Aug 3, 2019 at 9:11PM

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Indications that the semiconductor cycle might be bottoming out boosted its shares.

What happened

Shares of KLA (KLAC 3.40%) soared 15.3% in July, according to S&P Global Market Intelligence. This was all the more impressive since the strong July came on the back of a similar 14.7% surge in June.

KLA has dominant market share in the process diagnostic and control (PDC) market. PDC equipment is key to the highly complex process by which leading-edge semiconductors are made. As such, KLA shares tend to fluctuate with the overall semiconductor market. The chip market fell into a downturn late last year, though many chip and chip equipment stocks have risen in 2019 as investors look for signs of a cyclical bottom.

A worker in a white clean room full body suit holds a semiconductor chip up for inspection.

Image source: Getty Images.

So what

There wasn't much material news out of KLA during the quarter, but there were several events that boosted the prospects of the overall chip sector. First, in late June, a power failure at a factory co-owned by Toshiba Memory Corporation and Western Digital disrupted the supply of NAND flash chips, which had been in severe oversupply. Just a few days later, a conflict between Japan and South Korea arose, threatening key supplies of semiconductor materials and causing fear of further supply shocks.

These supply disruptions led some chipmakers to raise NAND prices in July, boosting prospects for this beleaguered section of the tech world.

KLA got yet another boost when its large customer Taiwan Semiconductor Manufacturing reported earnings, painting a more bullish demand picture for the second half of 2019 and announcing a boost to its capital expenditures.

Now what

Investors will get more color when KLA reports second-quarter earnings on Aug. 5. The consensus estimate is for $1.75 in EPS, which would mark a 17.75% decline from the prior year. Still, this quarter is projected to be the trough of the current downturn, so investors should watch for management's commentary to see if that is indeed the case.

Billy Duberstein owns shares of KLA-Tencor, Taiwan Semiconductor Manufacturing, and Western Digital. His clients may own shares of the companies mentioned. The Motley Fool recommends Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.

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