Secular AI And Advanced Packaging Trends Will Transform Markets

Key Takeaways

• Onto Innovation's new platforms and recent acquisition are driving industry-standard adoption, wider customer wins, and accelerating long-term recurring revenue and margins.
  
• Strategic global manufacturing and early-stage software adoption enhance operating resilience, de-risk revenue, and promise strong, sustainable earnings growth.
  
• Heavy customer concentration, regulatory threats, intense innovation demands, and shifting semiconductor trends all heighten revenue and margin risks for Onto Innovation.

Catalysts

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

• Analyst consensus is bullish on strong AI packaging growth, but this view may undervalue the full magnitude and duration of Onto Innovation's momentum, given the company's next-generation Dragonfly platform has not only won key qualifications but is seeing unexpectedly strong, multi-customer pull and expanding into new application segments-potentially supporting a step-function increase in recurring revenue and long-term market share gains.
  
• While most analysts expect advanced packaging and front-end metrology tool adoption to drive solid growth, this outlook likely understates both the breadth of Onto's wins (displacing incumbents across multiple customers and applications) and the "platform" nature of recent innovations, implying a sustained acceleration in net margin and earnings as new tools become industry standards for next-gen architectures.
  
• The Semilab acquisition catalyzes upside beyond consensus, immediately adding over $130 million in high-growth, high-margin product revenue, sharply boosting EPS in year one and unlocking additional cross-selling and product synergy opportunities as customers transition to more complex materials and 3D integration-supporting stronger-than-expected gross and operating margins.
  
• Onto is uniquely positioned to capitalize on the ongoing surge in global semiconductor fab construction and reshoring, with its aggressive region-for-region manufacturing strategy slashing future tariff costs to nearly zero while providing vertically integrated service to new fabs worldwide-directly translating to higher operating margin, resilient earnings, and de-risked global revenue streams.
  
• Adoption of Onto's data analytics and software for process control and yield optimization is still in early innings, yet rapid customer uptake points toward a long-term transformation in revenue quality-driving a greater share of high-margin, recurring software streams that could significantly improve both top-line predictability and gross margin over the next several years.

Onto Innovation Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Onto Innovation compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Onto Innovation's revenue will grow by 12.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 21.4% today to 23.6% in 3 years time.
• The bullish analysts expect earnings to reach $341.2 million (and earnings per share of $6.96) by about August 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 bullish analyst cohort, the company would need to trade at a PE ratio of 35.0x on those 2028 earnings, up from 20.7x today. This future PE is greater than the current PE for the US Semiconductor industry at 27.8x.
• 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 10.12%, as per the Simply Wall St company report.

Onto Innovation Future Earnings Per Share Growth

Risks

• Growing geopolitical tensions and ongoing exposure to tariffs present continued regulatory and operational risks, as evidenced by recent tariff impacts on gross margin and tariff expense guidance, which could lead to elevated cost of goods sold and downward pressure on net margins if trade barriers intensify or regulations shift unexpectedly.
  
• A large share of Onto Innovation's revenue comes from a concentrated set of customers-especially in advanced packaging and AI logic packaging-making the company vulnerable to abrupt capex spending slowdowns, technology insourcing, or buyer consolidation, which threatens top-line growth and could produce significant revenue volatility.
  
• The rapid pace of innovation in semiconductor process nodes, advanced packaging, and materials is escalating R&D demands; if Onto Innovation's platforms, such as Dragonfly and new Semilab-acquired product lines, fail to keep pace with evolving customer requirements or disruptive competitor innovation, earnings and net margins could suffer due to lost market share and greater pricing pressure.
  
• Long-term shifts in semiconductor manufacturing strategies-such as increased integration by fabless/foundry models and advances in in-line process control-risk shrinking the addressable market for standalone metrology and inspection tools, which would negatively affect Onto Innovation's revenue opportunities and overall earnings power as these trends accelerate.
  
• Persistent macroeconomic headwinds, including the risk of sustained high global interest rates and a possible long-term global growth slowdown, could suppress capital spending by leading semiconductor manufacturers, softening advanced node and specialty device demand, and putting ongoing pressure on Onto Innovation's revenue and profitability.

Valuation

• The assumed bullish price target for Onto Innovation is $190.0, which is the highest 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be $1.4 billion, earnings will come to $341.2 million, and it would be trading on a PE ratio of 35.0x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of $92.68, the bullish analyst price target of $190.0 is 51.2% 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.