AI Packaging Demand And New Metrology Tools Will Drive Future Semiconductor Advancements

Key Takeaways

• Strong growth in AI packaging and panel markets, along with new product launches, is expected to significantly boost revenue streams in the coming years.
  
• Increased adoption of metrology tools in advanced packaging processes indicates potential for sustained revenue growth as these tools become more integrated in industry practices.
  
• Heavy reliance on advanced packaging and AI markets presents growth potential but exposes the company to cyclical downturns, affecting revenue if demand shifts.

Catalysts

Engages in the design, development, manufacture, and support of process control tools that performs optical metrology and inspection worldwide.

• The strong growth in the specialty and advanced packaging markets, particularly driven by AI packaging demand, is expected to continue, with revenue from inspection tools for AI packaging having more than doubled in 2024 and further growth anticipated. This is likely to impact revenue positively.
  
• Increased adoption of Onto Innovation's front-end metrology tools to address the complexity of advanced packaging processes, with metrology revenue in advanced packaging more than tripling, indicates potential for revenue growth as these tools become more embedded in industry processes.
  
• Expansion into the growing panel market, especially with products like Firefly being adopted by leading panel manufacturers for use in new applications, opens additional revenue streams and opportunities for cross-selling integrated solutions, impacting overall revenue growth.
  
• New product launches in advanced packaging, advanced nodes, and power semiconductors, which are currently being proven out at major semiconductor and power manufacturers, are expected to contribute incremental revenues in 2025 and become a more significant revenue source by 2026.
  
• The expected growth in advanced node markets, supported by increasing demand for Iris film metrology tools and new product rollouts, along with capacity expansions in semiconductor technologies like gate all around and high-stack 3D NAND, suggests an increase in revenue from these segments.

Onto Innovation Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Onto Innovation's revenue will grow by 11.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.4% today to 33.9% in 3 years time.
• Analysts expect earnings to reach $468.7 million (and earnings per share of $7.84) by about March 2028, up from $201.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.0x on those 2028 earnings, down from 33.9x today. This future PE is greater than the current PE for the US Semiconductor industry at 26.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.5%, as per the Simply Wall St company report.

Onto Innovation Future Earnings Per Share Growth

Risks

• Onto Innovation's heavy reliance on advanced packaging and AI markets, while currently a strong growth driver, also increases exposure to cyclical downturns or shifts in those sectors, potentially affecting revenue growth if demand wanes or delays occur.
  
• The uncertainty around HBM (High Bandwidth Memory) allocations and tariff impacts could disrupt anticipated sales and margins, as any fluctuation in orders might lead to underutilized capacity and impact earnings projections.
  
• The competitive pressure in process control and metrology markets may force Onto Innovation to accelerate R&D and product roadmaps, potentially squeezing net margins if revenues do not offset the increased costs and competitive pricing pressures.
  
• While new products like EchoScan and 3Di offer growth potential, their success is contingent on market adoption and effective execution; delays or underperformance here could hamper anticipated revenue contributions and hinder overall financial performance.
  
• The company's large cash reserves being used for acquisitions carry the risk of integration issues or not delivering expected synergies, potentially dampening the return on investment and affecting future earnings growth.

Valuation

• The analysts have a consensus price target of $247.02 for Onto Innovation based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $280.0, and the most bearish reporting a price target of just $230.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.4 billion, earnings will come to $468.7 million, and it would be trading on a PE ratio of 33.0x, assuming you use a discount rate of 8.5%.
• Given the current share price of $138.76, the analyst price target of $247.02 is 43.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.