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GARPify Theme Report

The Machine Behind Every Chip

The two process-control and etch leaders whose equipment every semiconductor manufacturer must use

Report Date

August 4, 2026

Basket Members

2 operators

Next Update

Following Q1 FY2027 earnings

The Three Questions

Quality, growth, and price — the GARPify read on the basket

Question 1

Is this a great group of businesses?

KLA Corporation and Lam Research occupy chokepoints that no chip maker can bypass. KLA’s inspection and metrology tools catch defects at every layer; Lam’s etch and deposition equipment sculpts the structures themselves. The basket carries combined gross margins near 54% and a median ROIC above 20%, with revenue compounding 24% year-over-year in fiscal 2025. These are wide-moat franchises with durable customer relationships and high switching costs.

Question 2

Is the basket’s growth real?

Combined revenue reached $30.6B in fiscal 2025, both companies growing 24% year-over-year after the 2023 WFE trough. The growth is backed by rising wafer fabrication equipment spending tied to AI-driven leading-edge capacity additions and a memory technology upgrade cycle. KLA’s $7.9B remaining performance obligation and Lam’s $2.7B deferred revenue confirm demand already on the books — not inferred.

Question 3

Am I paying a fair price?

No. KLA trades at 50.2× its last twelve months of earnings, against a five-year average of 28.6×. Lam Research trades at 54.5×, against an average of 26.2×. Together the basket costs about 91% more than its own five-year norm. Equipment earnings rise and fall with the spending cycle. Earnings have been recovering since 2023, but the share prices have run much further and much faster — and that gap is the whole reason the multiples are this high. This is an expensive entry price.

The Two Operators

KLAC

Finds defects in every chip — inspection and metrology at every process step

LRCX

Builds the structures — etch and deposition systems that sculpt the chip layer by layer

The frameworks behind this report

GARPify stands on the shoulders of investors who built their track records in public

Warren Buffett

Quality · moat · long ownership

The Essays of Warren Buffett

Peter Lynch

Earnings · growth · price driver

One Up On Wall Street

Howard Marks

Sentiment · cycles · price

Mastering the Market Cycle

Charlie Munger

Risk · inversion · clarity

Poor Charlie's Almanack

Jim Collins

Leadership · discipline · the flywheel

Good to Great

Start Here

The Machine Behind Every Chip Story ->

What actually happens inside a fab — and why these two operators sit at the centre of it

Research disclosure. This report is impersonal analytical research, not personalized investment advice. GARPify is not a registered investment dealer, portfolio manager, or investment advisor with any securities regulator. The opinions expressed reflect the analytical framework of GARPify and are subject to change without notice. Past performance is not indicative of future results. Securities mentioned can decline in value. Data sourced from YCharts and primary regulatory filings as of the report date. See full Disclaimers →

The Big Story

Every chip passes through these two companies — many times

There is a simple physics problem with a profound business consequence. As the transistors on a chip shrink below five nanometres, three nanometres, two nanometres, the number of process steps required to build it grows — and at each step the probability that something went wrong is non-zero. A chip with a billion transistors has a billion places to fail. Catching those failures before they leave the fab is not optional. It is the difference between a working chip and scrap silicon.

That is the business KLA Corporation is in. Every chip, at every manufacturer, at every process node, passes through KLA's inspection and metrology tools. Not once — dozens of times. Every time the industry shrinks the transistor, it adds process steps, and KLA gets more passes. The market call KLA dominates — process control — is the one part of semiconductor equipment spending that cannot be deferred, because a fab that skips yield management loses yield, and lost yield is lost money.

Lam Research sits at the other chokepoint. Before any transistor can be inspected, it must be built — and building it means etching away layers of material with sub-nanometre precision and depositing new ones. That is Lam's aisle. Its etch and deposition systems carve the three-dimensional structures that make a modern chip possible. A leading-edge NAND memory die requires hundreds of etch steps. A leading-edge logic chip requires a different and equally demanding set. Lam doesn't just sell equipment; it sells the only tool that can do the job.

The fab needs more transistors → the transistors must be built (Lam) and inspected (KLA) at each layer → shrinking the node adds steps → more steps means more equipment revenue per wafer → both earnings compound → over time the price follows.

The business logic closes on itself. As long as the industry keeps shrinking the transistor — and it has been doing so for sixty years without stopping — the two companies at the front of every process step keep getting more work. The thesis is not about a single build cycle or a single customer. It is about a structural demand driver that has never reversed.

The WFE cycle and what it changes

Short-term noise over a long-term floor

Wafer fabrication equipment spending is cyclical. Fabs over-order in the good years and cut in the down years. In 2023 the industry went through one of its sharper troughs: LRCX revenue fell from $17.4B to $14.9B as memory manufacturers worked off excess inventory. KLA fared better but also felt the cycle, with revenue dipping from $10.5B to $9.8B.

Both companies recovered strongly in fiscal 2025. LRCX revenue recovered to $18.4B, up 24% from the trough year. KLA reached $12.2B, also up 24%. The recovery is driven by two converging forces: AI-driven leading-edge logic capacity additions at TSMC and Samsung, and a memory technology upgrade cycle as manufacturers transition to newer NAND and DRAM architectures that require more deposition and inspection steps per wafer.

This is also where the risk lives. A WFE cycle that turns down again — because memory manufacturers have again over-built or because leading-edge logic demand disappoints — would compress both companies' revenues. The early signal is not in these companies' results; it is in the capital spending guidance of TSMC, Samsung, Micron, and SK Hynix. Those four set the pace for everything downstream.

The signed demand

What is already on the books

Unlike a backlog that could be cancelled, KLA reports a remaining performance obligation of $7.9B — revenue from contracts already signed but not yet recognized. Lam reports $2.7B of deferred revenue — a conservative proxy for near-term committed work. These are not forecasts; they are accounting figures from primary regulatory filings.

Put the two readings together and roughly $10.6B of the next cycle's revenue is already contracted. The rest of this report is about the two operators delivering on that work — and how well each one is doing it.

Sources: KLAC 10-K fiscal year ended June 30, 2025 (CIK 0000319201); LRCX 10-K fiscal year ended June 29, 2025 (CIK 0000707549). Revenue figures from primary filings. RPO and deferred revenue from primary filings. All data as of report date.

YOUR READ

Peter Lynch's test: if you can't say in a sentence why a business makes money, you don't understand it well enough to own it.

Does the shrinking transistor → more process steps → more equipment revenue story convince you?

Your notes (optional)

CONTINUE

Next: Operators →

Research disclosure. This report is impersonal analytical research, not personalized investment advice. GARPify is not a registered investment dealer, portfolio manager, or investment advisor with any securities regulator. The opinions expressed reflect the analytical framework of GARPify and are subject to change without notice. Past performance is not indicative of future results. Securities mentioned can decline in value. Data sourced from primary regulatory filings and company disclosures as of the report date. See full Disclaimers →

Operators

The two operators catching the spend

The question — Who actually captures the spend, and how well are they run?

Two companies, two very different jobs inside the fab. KLA catches what goes wrong; Lam builds what must go right. Both are led by executives who have spent their careers in semiconductor equipment, with records that show up in the numbers.

Here's the short read on each — the full story lives in its own company report.

KLAC KLA Corporation

The inspector

Rick Wallace · President & CEO, two decades of tenure

Every chip manufactured anywhere in the world passes through KLA's inspection and metrology tools. Wallace built KLA into the dominant process-control company by focusing relentlessly on yield — the fraction of chips that actually work when they come off the line. A fab that skips yield management is a fab that ships defects. Wallace's insight is that KLA sits at the most undeferrable line item in semiconductor capital spending: you can delay a new etch tool, but you cannot delay finding out why your yield dropped. KLA carries a $7.9B remaining performance obligation and earns a 60.9% gross margin — the highest in the basket by a wide margin. See how —

KLA Corporation →

LRCX Lam Research

The sculptor

Tim Archer · President & CEO, long operational tenure

Archer inherited a company that already led in etch and grew it into the deposition leader too. Modern chip-making — particularly leading-edge NAND memory, which now stacks hundreds of layers vertically — is a precision sculpture problem, and Lam sells the only tools precise enough to do it. Its $18.4B in fiscal 2025 revenue was earned roughly evenly between foundry (45%) and memory (42%), with the service business — parts, upgrades, and customer-support contracts — making up 38% of revenue and providing a resilient floor through down cycles. The gross margin is 48.7%. See how —

Lam Research →

Each capsule is the short read. The full story on each operator — the curve, the track record, how they spend their money, and how their promises compare to what they delivered — is in the linked report. As always, GARPify lays out the facts and leaves the call to you.

YOUR READ

Warren Buffett buys businesses he'd be glad to own if the market shut for years — which starts with the people running them.

Are these the operators you would back to capture the spend?

Your notes (optional)

CONTINUE

Next: What's Changed →

What's Changed

The short read since last update

As of August 4, 2026 · fiscal year ended June 2025

The thesis is structural. The tape moves. Here's what actually shifted since last time — and the one thing that would make us tear the story up.

The recovery

Both companies reported +24% revenue growth in fiscal 2025 (year ended June 2025), recovering from the 2023 WFE trough. KLAC reached $12.2B; LRCX reached $18.4B. The recovery is broad-based: leading-edge logic additions at TSMC plus a memory upgrade cycle are both pulling.

China exposure

China remains the largest single geography for both operators: 33% of KLAC revenue, 34% of LRCX revenue. Export-control restrictions on advanced chip equipment to China continue to evolve. Both companies are complying with current rules, but the regulatory risk is live and the most direct near-term uncertainty in the thesis.

The demand

KLA's remaining performance obligation is $7.9B; Lam's deferred revenue is $2.7B. These are contracted, not forecast. The near-term demand signal is visible and positive.

The price

KLAC trades at 50.2× its last twelve months of earnings, against a five-year average of 28.6×. LRCX trades at 54.5×, against 26.2×. The basket costs about 91% more than its own five-year norm. That is the honest tension: the growth is real, but the price has run well ahead of the earnings behind it, and a multiple this far above its own history is unforgiving if the spending cycle turns.

The one thing to watch. A WFE-driven story breaks the day the fabs lose their nerve on capital spending. The warning will not come from KLAC or LRCX; it will come from the quarterly capex guidance of TSMC, Samsung, Micron, and SK Hynix. The first quarter one of those four talks about deferral instead of ramp is the quarter to re-read all of this. As of August 2026, guidance is pointing the other way.

Revenue, margin, and commitment figures from primary regulatory filings (KLAC 10-K, LRCX 10-K, fiscal year ended June 2025). This is a status update, not a recommendation.

YOUR READ

Howard Marks: a thesis can be durable while the tape moves — what changed is where you check that it still holds.

Does what changed this quarter strengthen or weaken the thesis?

Your notes (optional)

CONTINUE

Next: The Numbers →

The Numbers

Three questions decide whether a compounding thesis is worth owning — the basket answers them in order.

1 · Earnings

Is the basket’s growth real — and what pays for it?

2 · Future earnings

Does that earnings power keep growing, or roll over?

3 · Valuation

Are you paying a fair price for it?

Earnings Growth

The question — Is the basket’s growth real, and what pays for it?

Over time, price follows earnings. For a two-company basket the test is whether the growth is real — more wafers, more process steps, healthy pricing — or flattered by financial engineering. This tab puts the numbers on the table and asks whether the engine can keep running for years.

Is the basket growing earnings consistently?

Yes. Combined revenue across both operators reached $30.6B in fiscal 2025, both companies up 24% year-over-year. KLAC’s diluted post-split EPS has compounded from $1.34 (FY2020) to $3.67 TTM — a 22% five-year CAGR.

Is the growth real, or financial engineering?

Real. KLAC’s gross margin was 60.9% in FY2025; LRCX’s was 48.7%. Revenue growth drives margin expansion, not a shrinking share count. Both companies return capital aggressively but have not manufactured EPS through dilution.

What pays for the growth?

Wafer fabrication equipment spending. Leading-edge logic capacity additions at TSMC and Samsung, plus a memory architecture upgrade cycle driving more deposition and inspection steps per wafer. The durability is examined in Future Earnings.

Revenue, earnings, and margins — the financial record of both operators

Metric	FY2023	FY2024	FY2025	YoY
KLAC revenue	$10.5B	$9.8B	$12.2B	+24%
KLAC gross margin	~61%	~60%	60.9%	stable
KLAC EPS (post-split, diluted)	$2.03	$3.04	$3.67 TTM	+21%
LRCX revenue	$17.4B	$14.9B	$18.4B	+24%
LRCX gross margin	~47%	~47%	48.7%	expanding
Combined basket revenue	$27.9B	$24.7B	$30.6B	+24%

Sources: KLAC 10-K FY2025 (period ended June 30, 2025); LRCX 10-K FY2025 (period ended June 29, 2025). EPS post-split adjusted. FY2023–FY2024 figures from primary filings.

Basket financial trends

Revenue, earnings per share, operating margin, and shares outstanding over time

Revenue by geography — the China exposure

China is the largest single geography for both operators, a fact that is both the engine and the risk. KLAC earned 33% of its FY2025 revenue in China ($4.0B); LRCX earned 34% ($6.2B). Much of this reflects mature-node chip manufacturing in China that is not subject to current export controls — but the exposure is significant and the regulatory environment continues to evolve.

KLAC — revenue by geography FY2025

China33%

Taiwan27%

Korea12%

North America11%

Japan9%

Europe & other8%

LRCX — revenue by geography FY2025

China34%

Korea22%

Taiwan19%

Japan10%

US7%

SE Asia & Europe8%

Where the earnings land

Both companies grew revenue 24% in fiscal 2025 while maintaining gross margins above 48% (LRCX) and 60% (KLAC). KLA's post-split diluted EPS has compounded from $1.34 (FY2020) to $3.67 (TTM) — a 22% five-year CAGR — with the growth paid for by real customer demand, not buybacks. The 2023 trough interrupted but did not end the trajectory.

Whether the current recovery is durable is the next tab's question. What this tab establishes is that the earnings underneath this basket are real, large, and recovering strongly. The Risk tab examines what would break the thesis at the operator level.

YOUR READ

In The Essays of Warren Buffett, the durability of earnings power is treated as the central test of business quality.

If the market closed for five years, would you be comfortable owning these businesses based on their earnings trajectory alone?

Your notes (optional)

Future Earnings

The question — Over the next few years, does the basket’s earnings power keep growing strongly, flatten, or decline?

Every durable theme rides an adoption S-curve: a slow base, a steep middle as the shift compounds, then maturity. T. Rowe Price built a firm on catching the wave early. This tab places the basket on that curve — is the runway still long, or is the easy growth behind it? — because where you sit on the curve shapes every other reading.

Where does the next leg of earnings come from?

From two distinct drivers: leading-edge logic (AI chips at 3nm/2nm requiring more inspection and etch steps) and memory architecture upgrades (high-bandwidth memory and vertical NAND requiring more deposition layers). Both add steps per wafer, both add revenue per wafer.

How visible is the future demand?

Reasonably visible: KLA's $7.9B remaining performance obligation and Lam's $2.7B deferred revenue are contracted, not forecast. Beyond those figures, the demand signal lives in fab capex plans from TSMC, Samsung, Micron, and SK Hynix.

What would bend the curve down?

A WFE spending downcycle driven by fab over-build, demand disappointment, or tightening export restrictions on China sales. The 2023 trough is the most recent template: a 15–20% revenue decline lasting roughly two years before recovery.

Where this theme sits on the technology growth curves that drive it

An S-curve — or sigmoid — is the shape almost every lasting technology shift follows as it spreads through the world, and it has three phases. A slow base, while early adopters experiment and most people ignore it. A steep middle, where the shift compounds and adoption accelerates — this is where the bulk of the growth and of the investment returns is made. And a maturity plateau, as the market saturates and growth slows. The investor's job with a theme is to judge where on this curve it sits.

For semiconductor process control and etch, the relevant curves are not single events but layered cycles: each new process node is its own adoption curve, and a new node arrives roughly every two to three years. KLAC and LRCX benefit from each successive node because each one requires more equipment passes per wafer. They do not have one S-curve. They have a staircase of them.

What an S-curve is

The shape of an S-curve. Adoption is slow at first, steep in the middle, then levels off — the returns are made in the middle, the mistakes are made buying near the top.

Did the price follow the earnings?

The chart below tracks KLAC's equal-weighted total return (price) and diluted post-split earnings per share, both rebased to 100 at June 2021. Over the five-year window, KLAC's EPS grew from $2.19 (FY2021) to $3.67 (TTM) — a 1.7× increase. Over the same period the share price moved from roughly 100 to approximately 183 (indexed), a 1.8× increase. Price and earnings tracked closely; the gap is modest multiple expansion.

For most of the window, price and earnings moved together. The WFE cycle created a visible dip in 2023 as KLAC's EPS declined from $2.41 (FY2022) to $2.03 (FY2023) and the price pulled back with it. The recovery since then has been strong, with EPS reaching $3.04 (FY2024) and $3.67 TTM. The multiple expanded modestly but most of the price return is earnings-driven.

Leading-edge fab build outlook

Announced fab construction starts driving future equipment demand

YOUR READ

T. Rowe Price built a firm on a single idea — buy growth while the runway is long, because the fastest gains come in the steep middle of the curve, not at the top. The question is whether this basket’s earnings still have that runway.

Over the next few years, does the basket’s earnings power keep growing strongly, flatten, or decline?

Your notes (optional)

Valuation

The question — Is this basket cheap, reasonably priced, or expensive?

A wonderful theme and a wonderful entry price are not the same thing. Buffett’s line holds for a basket too: price is what you pay, value is what you get. This tab sizes up what the basket costs today — against its own history and against the growth it would have to deliver — so you can judge whether today is a fair entry.

Is the basket expensive?

Yes. KLAC trades at 50.2× its last twelve months of earnings against a five-year average of 28.6× — 75% above its own norm. LRCX trades at 54.5× against 26.2× — 108% above. The basket sits about 91% above its own five-year norms.

Is it reasonable for the growth?

Still no. Lam's PEG ratio is 1.4× and KLA's is 2.4×. Peter Lynch used 1.0 as his rough test of a fair price for the growth on offer. Both are above it, and KLA is more than double it.

Where is the risk in the price?

All of it is in the multiple. If each company simply returned to its own five-year average — 28.6× for KLAC, 26.2× for LRCX — with earnings unchanged, KLAC would trade near $105 and LRCX near $151. That is a drop of roughly 43% and 52%, with nothing going wrong at either business.

What you are being asked to pay today

Howard Marks's most practical insight is that there are no good ideas, only good ideas at the right price. Reading price discipline for this basket takes two readings: how it is priced against its own history, and how it is priced against the growth it has actually delivered.

KLAC: current price versus five-year history

KLA Corporation trades at $183.99 on market data as of August 21, 2026. It earned $3.67 per share over the last twelve months, which puts the price at 50.2× earnings. Its five-year average multiple is 28.6×. The stock is therefore about 75% above its own five-year norm. If the multiple simply returned to that average, with earnings unchanged, the share price would be near $105.

Lam Research is dearer still. It trades at $314.00 on trailing earnings of $5.76 a share — a multiple of 54.5× against a five-year average of 26.2×. That is 108% above its own norm, and a return to the average would put the shares near $151.

Averaged across the two, the basket trades at 52.3× trailing earnings against an average five-year norm of 27.4×. In plain terms: this basket costs roughly 91% more than it has typically cost over the past five years. It is not fairly priced and it is not close. It is rich, and by a wide margin.

There is a mechanical reason the number is this large, and it is worth understanding before drawing conclusions from it. Semiconductor equipment earnings are cyclical. Fabs order heavily in good years and cut hard in bad ones, so profits at KLA and Lam swing far more than the demand underneath them. The last twelve months still carry the shape of that cycle. Earnings have been climbing back since the 2023 downturn, but the share prices have climbed a great deal faster. A multiple is simply the price divided by the earnings. When the price climbs faster than the earnings for three years running, this is the number you end up with.

Two things follow. The first is that the multiple would look less extreme if you assumed earnings keep rising sharply from here — but that is an assumption about the future, not a fact about the price, and this report will not dress up one as the other. The second is that a cyclical business bought at twice its normal multiple carries two risks at once: the cycle can turn, and the multiple can fall. They tend to arrive together.

A history of the basket's sentiment periods

Sentiment is easiest to read in hindsight. KLAC's PE multiple traces the crowd's mood toward semiconductor process control over the past decade.

Pre-2020 · Good business, low profile — Indifference (PE ~20–25×)

Process control was valued as a niche semiconductor equipment business. No AI premium, no structural narrative. The multiple reflected solid but unexciting returns.

2021–2022 · Semiconductor super-cycle — Optimism (PE ~28–35×)

The chip shortage drove a re-rating as investors recognized the indispensability of process control. KLA's five-year average of 28.6× was set largely in this period.

2023 · WFE trough — back toward Fair Value (PE ~22–28×)

The WFE spending downcycle compressed the multiple as earnings slipped. The lowest-multiple the basket would get in the cycle — in hindsight, the entry of maximum opportunity.

2025–2026 · WFE recovery + AI narrative — Enthusiasm (KLAC PE 50.2×, today)

The recovery in equipment spending, plus the recognition of process control's role in AI chip manufacturing, has carried the price far past anything in the five-year record. At 50.2× earnings the stock costs 75% more than its own average. This is no longer the market pricing a recovery as durable. It is the market pricing a good outcome as already delivered.

The basket's mood has travelled from indifference to something well past optimism. At 50.2× trailing earnings for KLAC and 54.5× for LRCX, the good news of the equipment recovery is not merely absorbed — a good deal of news that has not arrived yet is absorbed with it. Buying here means paying today for earnings that still have to show up.

KLAC valuation history

Trailing PE and PEG ratio, quarterly, 2018–2026

KLAC price & technical context

Price history, drawdown from all-time high, and 12-month momentum

YOUR READ

In Mastering the Market Cycle, Howard Marks teaches that price discipline requires both reading where the cycle sits historically and reading whether the price is reasonable against the growth the business has actually delivered. Both readings matter.

Putting both readings together, is this basket cheap, reasonably priced, or expensive?

Your notes (optional)

CONTINUE

Next: Ways to Play →

Research disclosure. This report is impersonal analytical research, not personalized investment advice. GARPify is not a registered investment dealer, portfolio manager, or investment advisor with any securities regulator. The opinions expressed reflect the analytical framework of GARPify and are subject to change without notice. Past performance is not indicative of future results. Securities mentioned can decline in value. Data sourced from YCharts and primary regulatory filings as of the report date. See full Disclaimers →

Ways to Play

The question — If the thesis convinces you, how would you actually own it?

There are two ways in: buy one or both operators directly, or buy a semiconductor equipment fund that holds both. This tab lays out both — the operators side by side on quality, growth, and price, then the funds that give you the theme in one purchase. GARPify presents the options and leaves the choice to you.

KLAC vs. LRCX — side by side

Metric	KLAC	LRCX
Job in the fab	Inspection & metrology	Etch & deposition
Revenue FY2025	$12.2B	$18.4B
YoY revenue growth	+24%	+24%
Gross margin	60.9%	48.7%
Share price	$183.99	$314.00
PE on last 12 months' earnings	50.2×	54.5×
Its own 5-yr average PE	28.6×	26.2×
Premium to its own average	+75%	+108%
China revenue	33%	34%
Signed demand	$7.9B RPO	$2.7B deferred
Segments	3	1
Services share of revenue	~22%	38%

Sources: KLAC 10-K (June 30, 2025); LRCX 10-K (June 29, 2025). Share prices, trailing PE and five-year average PE from market data as of August 21, 2026. Not a recommendation.

The two companies are not substitutes for each other; they occupy different positions inside the fab. A chip going through a leading-edge logic flow will use both: Lam etches the structures and KLA checks the results. Owning both is the closest thing to owning the whole process-control and etch layer of the semiconductor stack.

The margin differential is the key financial distinction. KLA's 60.9% gross margin reflects the intellectual-property intensity of inspection — each tool is a precision measurement instrument with limited substitutes. Lam's 48.7% reflects a business that is also highly specialized but competes in a larger addressable market with AMAT as the primary rival. Both margins are high for capital equipment; KLA's is exceptional.

In a fund

Own the theme in a fund — and the one thing to know first

Read this first — this is not a recommendation

This is a map, not a list of picks. GARPify does not recommend any fund, is not paid by any fund company, and is not a licensed advisor. We just show what exists and what each fund actually holds — so you can research it yourself or take it to your own advisor.

If the thesis convinces you and you prefer exposure through a fund rather than individual names, KLAC and LRCX both appear prominently in semiconductor equipment funds. The two companies are large enough — and distinctive enough in their roles — that most broad semiconductor funds hold both. What follows is a best-fit map, fees shown, ordered by how cleanly each one holds the basket.

Semiconductor equipment funds — hold both KLAC and LRCX directly

SMHVanEck SemiconductorVanEck

US|MER 0.35%|AUM ~$22B|5-yr live at build

Holds both KLAC and LRCX. Cap-weighted toward the largest chip companies (NVDA, TSMC), so equipment names sit lower in the weights than their revenue share would imply — but both are present.

SOXXiShares SemiconductoriShares / BlackRock

US|MER 0.35%|AUM ~$12B|5-yr live at build

Holds both KLAC and LRCX with capped weights. Less top-heavy than SMH, giving equipment names a modestly larger relative footprint in the portfolio.

SOXQInvesco PHLX SemiconductorInvesco

US|MER 0.19%|AUM ~$2.4B|5-yr live at build

The 30 largest US-listed chip names — KLAC and LRCX included. Cheapest fee on this shelf.

Or one ticket — broad, diversified, lowest precision

XSDSPDR S&P SemiconductorSPDR / State Street

US|MER 0.35%|AUM ~$3.5B|5-yr live at build

Equal-weight — KLAC and LRCX each sit near ~3%, giving them a larger relative weight than in cap-weighted funds. A clean vehicle for someone who specifically wants equipment exposure alongside the chipmakers.

How to read the funds. A broad semiconductor fund gives you KLAC and LRCX as part of a larger mix of chip designers and foundries. If you want a purer process-control and etch bet, the individual names are the cleaner expression. No fund here is a recommendation — it is a best-fit map so you can see exactly what each one holds.

Want to understand the businesses, not just a blend? Every fund above dilutes the two operators with dozens of other chip-sector names. If you'd rather dig into the actual companies this report is about, that's what the two company reports are for: the curve, the track record, the capital allocation, and the guided-vs-delivered record on each.

Best-fit fund map as of mid-2026, across VanEck, iShares/BlackRock, Invesco, and SPDR/State Street. MER and holdings are from each provider's fact sheet. GARPify has no commercial relationship with any fund named here — inclusion is editorial. This is a description of investable vehicles, not investment advice.

YOUR READ

In One Up On Wall Street, Peter Lynch argues that the goal is to identify the operators with the strongest combination of business quality and growth-adjusted valuation.

How would you play it? Pick any that appeal — one or both operators, a fund, or both.

Your notes (optional)

CONTINUE

Next: Risk →

Research disclosure. This report is impersonal analytical research, not personalized investment advice. GARPify is not a registered investment dealer, portfolio manager, or investment advisor with any securities regulator. The opinions expressed reflect the analytical framework of GARPify and are subject to change without notice. Past performance is not indicative of future results. Securities mentioned can decline in value. Data sourced from YCharts and primary regulatory filings as of the report date. See full Disclaimers →

Risk

The question — What would have to go wrong — and can you underwrite those risks?

Charlie Munger solved problems backwards: tell me where the theme breaks, and I’ll know what to watch. This tab inverts the thesis — what would have to go wrong for the whole basket, how likely each threat is, and how survivable. The goal isn’t a theme with no risks; it’s knowing exactly what you’re accepting.

What is the most direct risk?

That wafer fabrication equipment spending turns down again — as it did in 2023 — before the current multiples have had time to grow into them. A WFE downcycle compresses both revenue and the multiple simultaneously.

What is the structural risk?

China. Both companies earn roughly 33–34% of revenue there. Tightening export controls on advanced chip equipment to China could permanently impair that revenue stream — and neither company can easily replace it.

What would permanently impair the thesis?

A technology transition that makes current inspection or etch approaches obsolete — for example, EUV lithography eventually reducing the number of multi-patterning steps that drive KLAC's process-control intensity. Currently not visible but worth monitoring.

What could break the thesis

Every thesis has a counterweight. Charlie Munger insisted the only way to understand a business is to invert — to study not what would make it succeed but what would make it fail. The Machine Behind Every Chip basket has five identifiable risks, ordered here from most to least observable.

Risk One — WFE Cyclicality

The single most observable risk is the WFE spending cycle. Semiconductor equipment spending is cyclical: fabs over-order in the good years and cut in the down years. The 2023 cycle saw LRCX revenue decline from $17.4B to $14.9B in a single fiscal year. KLAC was more resilient but also felt the trough.

The current recovery has been strong, but the cycle has not been repealed. The signal to watch is the annual capex guidance of TSMC, Samsung, Micron, and SK Hynix — these four fabs set the pace for everything downstream. The first quarter any of them guides meaningfully lower is the quarter to re-read the full thesis.

Risk Two — China Export Controls

China accounts for 33% of KLAC revenue ($4.0B) and 34% of LRCX revenue ($6.2B). These are the largest single geographies for both companies. Much of this revenue derives from mature-node chip manufacturing that is currently not subject to US export controls. But the regulatory environment is evolving, and the direction of travel has been toward tighter restrictions.

A significant tightening of export-control rules covering the equipment these two companies sell would impair a substantial fraction of their revenue. This risk is live, observable, and not fully hedged by any current business strategy. It is the most asymmetric risk in the basket: unlikely to result in 100% loss of China revenue, but possible to result in meaningful impairment of it.

Risk Three — Customer Concentration

KLAC's largest single customer accounts for 19% of revenue. LRCX's top two customers represent 17% and 15% of revenue respectively. This concentration means a strategic change at a single large fab — an efficiency push, a capex reset, or a decision to shift volume to a competitor — is felt meaningfully across one or both companies.

The concentration is structural and permanent; it is not flashing red in current data. But it keeps the risk live regardless of the spending trend.

Risk Four — Technology Transition Risk

The thesis rests on the assumption that smaller transistors require more process-control and etch steps per wafer. This has been true for decades. But technology transitions can surprise. The introduction of EUV lithography reduced the number of multi-patterning steps required at leading nodes, which was initially expected to reduce KLAC's inspection intensity. So far this has not materialized — EUV itself introduces defectivity challenges that require more, not fewer, inspection passes. But the risk of a future technology transition that changes the step-count economics is real and worth monitoring.

Risk Five — Valuation Multiple Compression

Even if the business thesis is correct, the entry price matters — and on this basket the entry price is the largest risk of the five. KLAC trades at 50.2× its last twelve months of earnings against a five-year average of 28.6×. LRCX trades at 54.5× against 26.2×. Those are premiums of 75% and 108% to each company's own record.

Work through what a simple return to normal would cost. If KLAC's multiple fell back to 28.6× with earnings unchanged, the share price would be about $105 against today's $183.99 — a fall of roughly 43%. If LRCX's fell back to 26.2×, the price would be about $151 against today's $314.00 — a fall of roughly 52%. Neither figure assumes a single bad quarter at either business. They assume only that the market stops paying twice the usual price.

This is worse than it looks in a cyclical business, because the multiple and the earnings do not move independently. In a spending downturn, earnings fall and the multiple the market is willing to pay falls with them. The two multiply. That is why paying a full price for a cyclical company is a different proposition from paying a full price for a steady one.

The Integrated Bear Case

The most plausible bear case does not require any operator to lose its competitive position. It only requires the equipment spending cycle to disappoint what the market has priced in, for long enough that the current multiples cannot be sustained.

It would likely start in guidance language. A major fab customer — perhaps one of the Korean memory manufacturers — talks about deferring equipment purchases while it absorbs capacity already installed. The language is careful but the market reads the direction. Simultaneously, incremental China export restrictions reduce both companies' accessible markets by a few percentage points. Neither is catastrophic alone; together they are enough to pull earnings down and the multiple back toward its average.

What this scenario does not require. It does not require China to lose all its semiconductor manufacturing. It does not require EUV to make inspection obsolete. It does not require KLAC or LRCX to lose market share. It only requires the growth rate to slow and the multiple to normalize.

How to weigh this. The bear case is not the base case. WFE spending guidance as of mid-2026 remains constructive, China revenues are compliant with current regulations, and both companies' order books are full. The point of writing the bear case down is to define, in advance, the signals that would tell you it had started.

Where the Risks Land

The two risks currently flashing are China exposure (structural and live) and valuation (above mean, unforgiving if growth disappoints). The WFE cyclicality risk is dormant in the current data but is the one to watch most closely — it shows up in fab capex guidance before it shows up in equipment revenue. Technology transition and customer concentration are structural and permanent but currently dormant.

YOUR READ

In Poor Charlie's Almanack, Charlie Munger argues that the best risk analysis starts by inverting the problem.

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