Morgan Stanley has upgraded its rating for KLA Corporation (KLA) to overweight, emphasizing the company's strategic positioning as investor focus shifts toward foundry logic spending. This shift is driven by the increasing demand for foundry capacity alongside memory, which remains a key bottleneck for AI development. The bank anticipates that this trend will boost capital spending in foundry logic, potentially matching the growth seen in memory equipment.

The upgrade reflects Morgan Stanley's expectation that KLA will benefit from rising process control intensity at leading-edge foundries. The bank models KLA’s share of TSMC capital spending to increase by 30 basis points in 2026 and a further 40 basis points in 2027, driven by greater inspection and metrology needs. Additionally, Intel is expected to contribute to this growth in 2027. Morgan Stanley has raised its 2026 and 2027 EPS estimates by 7% and 14%, respectively, and forecasts revenue growth of 16% in 2026 and 19% in 2027, surpassing street expectations of 10% and 9%.

The bank's upward revisions are largely attributed to foundry logic, with estimates for 2026 and 2027 lifted by 10% and 18%, respectively. In contrast, memory estimates saw increases of 4% and 10%. Morgan Stanley also points out that KLA’s memory exposure remains underappreciated, expecting KLA’s memory share to rise to 7.2% in 2025–27 from an average of 6.8% in 2022–24. This is supported by higher process control intensity across DRAM and NAND. The bank has raised its valuation multiple to 33x from 27x, citing structural growth in process control, and set a $1,697 price target, implying 18% upside.

This upgrade comes at a time when the semiconductor industry is experiencing heightened demand for advanced manufacturing technologies, particularly in the AI sector. KLA's position in the market is strengthened by its ability to provide critical inspection and metrology solutions. Investors are likely to monitor KLA's performance closely, given the bank's bullish outlook and the potential for significant revenue and EPS growth in the coming years.