Onto Innovation Inc. (ONTO) in Flanders, N.J. engages in the design, development, manufacture, and support of process control tools that perform macro defect inspection and metrology, lithography systems, and process control analytical software worldwide. ONTO’s shares have gained 42.6% in price over the past year and 20.7% over the past six months. 

However, the stock has slumped 13.2% year-to-date to close the last trading session at $87.85. But Wall Street’s median price target of $118.75 indicates a potential 35.2% upside from the previous closing price.

The company has been deepening its customer collaborations across the semiconductor value chain over the last two years. In addition, ONTO delivered record full-year capital equipment revenue of $634 million, representing a 49% increase year-over-year. Also, it surpassed analysts’ estimates in both its top and bottom lines in its last reported quarter. “It is exciting to finish a record year of revenue growth with a record quarter in our core markets: advanced nodes, specialty devices, and advanced packaging,” said Michael Plisinski, the company’s chief executive officer.

Click here to checkout our Semiconductor Industry Report for 2022

Here’s what could shape ONTO’s performance in the near term:

Growing Order Backlog

Last month, ONTO announced a total order backlog of $500 million, which includes more than $100 million for its lithography and inspection products in support of the emerging heterogeneous packaging sector, which covers technology designed for 2.5D and next-generation 3D packages and those using hybrid bonding as a method of connecting stacked chips. 

ONTO has received orders for its new JetStep® X500 lithography system for shipment in 2022 and 2023 to support 2.5D heterogeneous packaging on advanced substrate panels. Also, it received more than $12 million in orders for its Dragonfly® G3 inspection system, which offers the sub-micron metrology resolution needed for advanced packages using the new hybrid bonding technology. The company focuses on delivering flexible, high-performance products that span the entire manufacturing process across factories in the value chain. These products also demonstrate the strong demand for ONTO’s products, which should help the company grow and generate solid returns in the coming months.

Last December, ONTO announced $85 million in orders from a 3D NAND manufacturer for its integrated OCD and thin-film metrology suite, with deliveries beginning this year and into the first half of 2023.

Impressive Profit Margins

ONTO’s 28.30% and 18.04% respective EBITDA and net income margins are 100.1% and 195.3% higher than the industry averages of 14.14% and 6.11%. Also, its 15.78% levered FCF margin is 56.9% higher than the 10.06% industry average.

And ONTO’s ROE, ROA, and ROTC of 10.58%, 8.63%, and 7.30%, respectively, compare with the 7.56%, 3.85%, and 4.97% industry averages.

Better-Than-Expected Last Reported Quarter

For the fourth quarter, ended December 31, 2021, ONTO’s revenues increased 45.5% year-over-year to $225.64 million, topping the Street’s expectations by $10.44 million. Its gross profit stood at $123.80 million, up 64.3% from the year-ago value. Also, the company’s non-GAAP net income came in at $61.22 million, indicating an increase of 72.2% year-over-year, while its non-GAAP EPS grew 70.8% from the prior-year quarter to $1.23. The company’s EPS surpassed the consensus estimate by 10.8%.

Solid Past and Expected Performance

ONTO’s revenues have increased at a 42.3% CAGR over the past three years and 27.7% over the past five years. Also, its net income and EPS have grown at  CAGRs of 46.7% and 18%, respectively, over the past three years. And its EBITDA grew at a 57.2% CAGR, while its levered FCF grew at a 95.2% CAGR over the same period.

Furthermore, the Street expects year-over-year revenue growth of 43% in the current quarter, ending March 31, 2022, 24.6% in the following quarter, and 21.5% in the current year. And  its EPS is expected to grow 60.3% year-over-year in the current quarter to $1.17. Analysts expect the EPS to increase by 31.5% in the next quarter and by 25.4% in the current year.

POWR Ratings Show Promise

ONTO has an overall B rating, which translates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a B grade for Quality, consistent with its higher-than-industry profit margins.

ONTO has a B grade for Sentiment. Favorable analysts’ sentiments surrounding the stock justify this grade.

Among the 97 stocks in the B-rated Semiconductor & Wireless Chip industry, ONTO is ranked #32.

Beyond what I have stated above, one can view ONTO’s grades for Value, Stability, Momentum, and Growth here.

View the top-rated stocks in the Semiconductor & Wireless Chip industry here.

Bottom Line

Over the past few years, the company has demonstrated solid growth, and analysts are bullish about its near-term performance. Moreover, the increasing global emphasis on combating climate change and inclination towards more smart technologies should benefit the company. Thus, I think it could be wise to buy the dip in the stock.

How Does Onto Innovation Inc. (ONTO) Stack Up Against its Peers?

ONTO has an overall POWR Rating of B. However, one could also check out these other stocks within the Semiconductor & Wireless Chip industry with A (Strong Buy) rating: inTest Corporation (INTT), Qualcomm Inc. (QCOM), and Photronics, Inc. (PLAB).

Note that ONTO is one of the few stocks handpicked by our Chief Value Strategist, Steve Reitmeister, currently in the POWR Value portfolio. Learn more here.

Click here to checkout our Semiconductor Industry Report for 2022

ONTO shares were trading at $87.67 per share on Monday morning, down $0.18 (-0.20%). Year-to-date, ONTO has declined -13.40%, versus a -8.77% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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