KLA drops 9.5% as chip-equipment selloff deepens after rally

KLA Corp. shares tumbled 9.5% on June 5, their steepest drop in months, as traders locked in gains after a 74.9% year-to-date rally.

"The move reflects profit-taking after an extraordinary run, compounded by broader concerns about the pace of AI-related capital expenditure," said Krish Sankar, an analyst at TD Cowen who maintains a Buy rating on the stock. "KLA's valuation at 59.6 times earnings leaves little room for error."

The drop erased a portion of the gains accumulated since the company announced a 10-for-1 stock split and a higher quarterly dividend alongside guidance extending through 2027. KLA, which specializes in semiconductor process control systems, has been a key beneficiary of AI infrastructure buildouts requiring more complex chips and advanced packaging. The company expects fourth-quarter fiscal 2026 revenue of $3.575 billion and non-GAAP earnings of $9.87 per share.

The selloff in KLA outpaced declines in the broader market, showing the heightened volatility in names that have rallied sharply this year. The stock had surged 23% in the 30 days through June 4, pushing its valuation to levels that some analysts consider stretched. The average analyst price target of $1,931.70 implies roughly 5.7% downside from current levels, according to TipRanks data, even as the consensus rating remains a Strong Buy. Insider selling over the past three months has also been flagged as a potential caution signal, according to Simply Wall St.

The decline comes at a critical juncture for semiconductor capital equipment companies, which have been among the biggest beneficiaries of the AI infrastructure buildout. KLA's process control tools are essential for managing the increasing complexity of chip manufacturing at advanced nodes, including 3-nanometer and 2-nanometer processes. Any pullback in AI-related capital spending by hyperscalers could pressure the entire equipment supply chain, including peers such as Teradyne and Applied Materials.

For investors, the key question is whether the June 5 selloff represents a healthy correction in an overheated stock or the beginning of a broader rotation out of semiconductor names. KLA trades at 59.6 times forward earnings, a premium to the broader market and to many semiconductor peers. The company's guidance through 2027, tied to AI infrastructure and advanced packaging demand, provides a multiyear growth narrative, but the elevated valuation leaves the stock vulnerable to any signs of a spending slowdown. The Zacks Industry Rank places the Electronics-Miscellaneous Products group in the top 24% of industries, suggesting analysts remain bullish on the sector's earnings prospects despite the near-term volatility. KLA's next major event will be its fiscal fourth-quarter earnings report, where investors will watch for any changes to the 2027 guidance framework.

This article is for informational purposes only and does not constitute investment advice.