Advanced Packaging And AI Products Will Expand Opportunities

Key Takeaways

• Growth in advanced packaging and AI markets, alongside new product introductions, expected to positively impact revenue and future earnings.
  
• Increased R&D investment to maintain competitiveness may raise expenses short-term, but positions for long-term profitability and margin improvement.
  
• Onto Innovation faces revenue volatility and margin pressure due to heavy reliance on AI packaging, innovation cycles, and market demand fluctuations, compounded by regulatory risks.

Catalysts

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

• Growth in 2.5D logic packaging and AI packaging markets is expected, driven by increased demand for advanced packaging solutions, impacting revenue positively.
  
• The introduction and qualification of new products such as EchoScan and 3Di are likely to result in incremental revenue from these innovations, potentially impacting future earnings growth.
  
• The adoption of new technologies like gallium nitride-based power semiconductors could drive efficiency improvements and increase demand in power devices, enhancing net margins.
  
• Expansion into the panel market, especially with glass panels for enterprise server and AI applications, presents opportunities for future cross-selling and integrated solutions, potentially boosting revenue.
  
• With elevated investment in R&D to accelerate product innovation, maintaining competitiveness could lead to higher operating expenses, impacting short-term net margins but positioning for longer-term growth.

Onto Innovation Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Onto Innovation compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Onto Innovation's revenue will grow by 5.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 21.4% today to 28.6% in 3 years time.
• The bearish analysts expect earnings to reach $343.9 million (and earnings per share of $6.45) by about July 2028, up from $218.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 16.1x on those 2028 earnings, down from 21.7x today. This future PE is lower than the current PE for the US Semiconductor industry at 30.9x.
• Analysts expect the number of shares outstanding to decline by 1.03% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.46%, as per the Simply Wall St company report.

Onto Innovation Future Earnings Per Share Growth

Risks

• Onto Innovation's dependency on the AI packaging market, which, despite growth, faces risks such as potential market saturation and the impact of governmental regulations like tariffs, could impact its future revenue streams and profit margins.
  
• The company's revenue streams are heavily tied to technology cycles and require continuous innovation and timely delivery of new products. Any delays or failure in product launches could adversely affect revenue growth.
  
• The expenditure on research and development is increasing to meet customer demands for innovation, which may pressure net margins if the return on investment does not meet expectations.
  
• Onto Innovation is exposed to risks from fluctuations in demand for its products in advanced nodes and NAND markets, which, despite current positive trends, are susceptible to broader semiconductor industry cycles that could lead to revenue volatility.
  
• The company's execution on acquiring and integrating new technology and its dependency on successful client qualifications for future revenue streams introduces risk to the predictability of its financial performance and earnings.

Valuation

• The assumed bearish price target for Onto Innovation is $90.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Onto Innovation's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $190.0, and the most bearish reporting a price target of just $90.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $343.9 million, and it would be trading on a PE ratio of 16.1x, assuming you use a discount rate of 9.5%.
• Given the current share price of $97.17, the bearish analyst price target of $90.0 is 8.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.