The sprawl of the semiconductor sector sometimes feels as complex as the chips themselves. There are chip designers such as Nvidia (US:NVDA), and manufacturers such as TSMC (TW:2990). Then there are those making equipment for manufacturers, ASML (NL:ASML) being the most prominent example. In the US, there are three main equipment players, namely Applied Materials (US:AMAT), Lam Research (US:LAM) and KLA Corporation (US:KLAC).
KLA can be distinguished further: it prioritises process control and yield management tools. In short, it provides testing and inspection products that ensure semiconductor manufacturers can run at full speed.
Process control makes up nine-tenths of revenues and gross profits (the remainder is other component manufacturing and the testing of other chip equipment). KLA’s leading position – the company says its market share is five times bigger than global competitors’ – has helped produce a highly profitable business. High switching costs, as well as KLA's generous R&D expenditure, give it a good competitive moat. Returns on invested capital are above 30 per cent, while its sector-leading operating margin sits at close to 40 per cent.