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Key Points
- Lumentum, KLA, and NetApp have each boosted margins amid the AI buildout, but through distinctly different and not equally sustainable strategies.
- Lumentum expands margins through rising factory utilization and operational efficiency, while KLA defends margins via its dominant inspection and measurement moat.
- NetApp's margins depend on passing along NAND flash memory price increases, leaving it exposed as that pricing cycle now shows signs of slowing.
- Special Report: Bezos… DOOMED?
Pricing power is often thrown around as a blanket argument for owning certain stocks, but it's important to understand where it comes from and what can put it at risk. The AI buildout has created a wave of new business for semiconductor companies, and bottlenecks in crucial components and energy have altered some formerly predictable price cycles.
Three of the biggest winners have been Lumentum Holdings Inc. (NASDAQ: LITE), KLA Corp. (NASDAQ: KLAC), and NetApp Inc. (NASDAQ: NTAP), but each reached its margin boom through a very different path. Some companies grow margins by increasing volume and improving productivity. Others maintain margins through first-mover advantage and lack of competition. And finally, some pass higher costs on to customers and pocket several basis points of margin in the process. Each of these three stocks utilizes one of these strategies, and differentiating between sustainable and unsustainable margins is crucial for investors in this space.
Lumentum: Margin Growth From Accelerating Volume and Factory Utilization
Lumentum is aptly named, as its primary revenue drivers are lasers and optical parts used to move data between AI chips.
As AI clusters get bigger, traditional conduits like copper wire no longer make sense. Lumentum sells the lasers that power complex AI data transmissions, and it can credit operational efficiencies for its margin expansion.
Lumentum’s factories are busy, and management credited operational rigor and pricing discipline for its outsized success. The company reported revenue of $1.01 billion in Q4 of its fiscal 2026 (FY2026), more than double that of a year ago. Full factories drive revenue higher, and margin expansion is a byproduct as operational efficiencies increase.
Lumentum guided revenue to $1.225 billion to $1.275 billion in Q1 FY2027, with operating margins at 40.5% at the top end, up from 36.6% in fiscal Q4.
The daily LITE chart shows a dip that has been bought, and bullish signals point to more upside ahead as the stock closes in on the April all-time high. The share price is once again trading above the 50-day and 200-day moving averages, with the 50-day acting as support over the last two months.
Trading has been choppy since the new uptrend began, but the relative strength index (RSI) shows that bullish momentum has been building slowly without getting too volatile. The indicator is still below the overbought threshold of 70, so there’s likely more room for gains in LITE shares.
KLA Corp: Defending Margins Through Process Control Moat
KLA dominates the inspection and measurement segment of the semiconductor processing chain, and its products already have a dominant presence across foundries.
Flaws caught by KLA machinery save semiconductor fabs time and capital, and its moat protects margins despite projected industry growth. In Q4 FY2026, KLA management boosted its total wafer equipment market projection to $150 billion from $140 billion for calendar 2026.
The company already earned more than $820 million in recurring service contracts in the period, and its gross margin was unchanged at 62.5%. Management projected a top-line gross margin of 65% through 2027, balancing sales growth with headwinds from memory pricing, tariffs, and supply constraints.
KLAC has suffered the largest recent drawdown of the three stocks on our list, declining more than 30% from the all-time high set back in June. But based on the price action, this drawdown was more technical than fundamental, and the technicals are now starting to reverse their bearish momentum.
After bouncing off support at the 200-day moving average, the stock broke above the 50-day moving average for the first time since early July. A bullish crossover on the MACD indicator confirmed the new uptrend, and KLAC shares appear ready to resume their quiet compounding once again.
NetApp: Flash Memory Price Cycle Puts Margins at Risk
NetApp has limited control over one of the biggest factors shaping its performance: margins. External forces play an outsized role in determining profitability, leaving the company exposed to pressures it cannot easily offset.
The company’s fastest-growing systems are built on NAND flash memory used in AI data centers, but it buys this memory and repackages it for clients.
NAND memory prices have grown exponentially over the last few quarters, and NetApp has captured those price increases and passed them on to clients.
But this memory price growth is finally slowing, highlighting NetApp's lack of control over its own margins. The company earned a 54.6% gross product margin in fiscal Q1 2027, down 150 basis points from the previous quarter due to flash chip cost expansion.
Q2 2027 gross margins were also guided down, showcasing the company’s susceptibility to forces outside its control.
Despite the most future margin uncertainty, investors in NTAP shares are forging ahead full steam. Buyers have shaken off the earnings news and pushed the stock to a new all-time high above $210, surpassing the previous all-time high set in early August. A new high at this point in the cycle might entice profit-taking given the margin risk, but the technical signals don’t yet show any evidence of that.
The RSI is firmly in bullish territory without triggering any Overbought warnings, and the MACD shows a bullish crossover above the histogram, which typically implies more upside ahead. If memory prices decline more slowly than anticipated next quarter, traders who bought this dip could be handsomely rewarded.
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