This under-the-radar chip stock is in Nvidia's supply chain and profiting from AI boom, fund manager says

Published Sun, Mar 10 20247:18 PM EDT

KLA Corp could be a lesser-known semiconductor equipment company to profit from the AI boom, according to fund manager Stephanie Niven. KLA is known for making semiconductor manufacturing equipment used in a process known as "yield management." Chip makers like TSMC use the California-headquartered firm's products to improve manufacturing efficiency. TSMC , the exclusive manufacturer of high-end AI chips for Nvidia , is also KLA's biggest customer. KLAC 1Y line While not a headline AI stock itself, Niven, global sustainable equity portfolio manager at Ninety One, said KLA plays a critical supporting role in enabling AI capabilities. The fund manager also pointed out that by reducing wastage in a resource-heavy manufacturing process, an investment in KLA could also be viewed through a sustainability lens. "[KLA] is a semiconductor equipment maker, and it leans into the supply chain of AI," Niven told CNBC's "Squawk Box Europe" Friday. "This is a business that decarbonizes the AI transition because it reduces errors and increases yields." KLA Corp is the eighth largest holding in Niven's Ninety One Global Sustainable Equity fund with a 4.7% allocation. The fund outperformed its benchmark in 2022. KLA has generated impressive returns amid the AI semiconductor upswing. Shares of the company have risen 25% in 2024. The stock has also soared 89% over the past 12 months. It now trades at 27 times forward earnings, compared to its five-year average of 18 times earnings. Forward earnings are an important metric used by traders to gauge the value of an asset or index. Wall Street analysts caution that the significant stock price run-up may lead to a drop in the near term. "Given the stock's recent strength, it shouldn't surprise if the stock trades lower tomorrow," said Stifel analysts led by Brian Chin in a note to clients on Jan. 26. The consensus price target of all analysts compiled by FactSet points to a 6.7% downside. However, a majority of analysts are bullish on the company's fundamentals with a buy rating. Niven also dismissed KLA's high valuation multiples, suggesting that KLA's future looks very different from its past. "Businesses change. You have to look forward, you have to look: 'Well, what are the growth opportunities today and why is this business going to put capital behind backing a sustainable return into that growth opportunity?'," she added. Analysts also expect KLA's fortunes to pick up in the back half of this year and continue further in 2025 when the latest transistor manufacturing technology, "Gate-All-Around," is established at chip makers like Intel , TSMC, and Samsung .