The Best Semiconductor Stocks to Buy Now

The investment thesis for KLA $Kirkland Lake Gold Ltd (KLA.AU)$ which offers semiconductor manufacturing solutions, is simple: fundamentals and industry outlook. And it's one that remains intact following the company's fiscal first-quarter earnings report.

Revenue and GAAP earnings were up 30% and 3% year-over-year, respectively. The reported revenue of $2.72 billion is consistent with the higher end of KLA's guidance range of $2.47 billion-$2.72 billion.

KLA also expects to sustain its bottom-line growth, with earnings per share (EPS) guidance of $7.34 for the fiscal second quarter. This would represent about a 2% sequential growth at the top end of the range.

The company sports a decent balance sheet with good liquidity, and operating cash flow exceeded $1 billion in the first quarter. Its free cash flow (cash from operations less capital expenditures), on the other hand, grew to $927 million – a 24% increase from the previous quarter and 37% year-over-year.

Sales growth, guidance for continued EPS improvement and a decent balance sheet is probably what insulated KLAC shares from the overall downdraft in semiconductor stocks. Shares are off just 5% in the past 12 months (less if you net out the 1.35% dividend), versus the iShares Semiconductor ETF (SOXX), which is down 30%.

This is not an entirely logical constellation, however. Semiconductor supply companies face a big concentration as there are a limited number of customers big enough to service the foundries and related companies. So, when one or all of these customers face troubles, it can spell trouble for KLA too. Though Taiwan Semiconductor $Taiwan Semiconductor (TSM.US)$ and Advanced Micro Devices $Advanced Micro Devices (AMD.US)$ are still growing, for example, Nvidia's $NVIDIA (NVDA.US)$ sales contracted in the most recent quarter. This trend bears watching.

Notwithstanding, a sure sign of management confidence – or hubris – is KLA's use of cash, the largest expenditure of which were for the company's stock buybacks and payments of dividends to shareholders, at 82% of free cash flow. All in, KLA returned a total of $1.33 billion to shareholders in the 12 months ending September 2022. For a company with a market cap of around $60 billion, this is a big number.

And behind financial strength and earnings momentum is increasing demand for semiconductors worldwide in the form of a one-two punch. In addition to governments mobilizing to increase production as a means of weaning their economies from reliance on South Korean and Taiwanese chip giants Samsung and Taiwan Semiconductor, the digitization of daily life is putting chips in everything from doorbells to automotive systems.

All of this makes KLAC one of the best semiconductor stocks going forward. The stock has been rallying since October but is still lower on a year-over-year basis, which makes now a good time to consider KLA shares.