Secular Trends In AI And Cloud Will Expand Inspection Solutions

Key Takeaways

• Robust demand for advanced semiconductors and AI is rapidly expanding Onto's market for inspection and metrology, driving sustained revenue and margin growth.
  
• Innovation in AI analytics and advanced packaging is strengthening Onto’s competitive position, enabling higher-margin product adoption and long-term recurring revenue streams.
  
• Reliance on a concentrated customer base, external risks, and competitive pressures threaten Onto Innovation’s growth, profitability, and market position amid evolving regulatory and industry environments.

Catalysts

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

• Surging demand for AI accelerators, cloud computing, and high-performance computing is fueling rapid growth in advanced semiconductor devices and packaging, leading to a significant increase in orders and adoption of Onto Innovation’s inspection and metrology products. This structural demand is expected to drive sustained revenue growth and strong earnings expansion as advanced packaging and AI-related segments continue to outpace overall semiconductor capital expenditure growth.
  
• The proliferation of connected and intelligent devices, alongside the expansion of infrastructure for edge and IoT applications, is increasing the complexity and scope of semiconductor manufacturing. This trend is boosting the need for more rigorous and frequent process control and inspection, expanding Onto’s addressable market and supporting both higher product pricing and the company’s ability to achieve record quarterly revenues.
  
• Onto’s growing presence in high-value new technology nodes and advanced packaging segments—such as 2.5D logic, HBM, and 3D NAND—is enabling greater product mix shift toward higher-margin tools. The company’s continuous gross margin improvements and the expectation of further quarter-over-quarter margin expansion suggest that these trends will enhance net margins and operating leverage going forward.
  
• Leadership in product innovation, particularly in areas such as AI-powered analytics, multi-sensor defect inspection, 3D integration, and yield management, is positioning Onto to capture greater market share within emerging and specialized markets, like glass and panel-level packaging. These differentiated solutions are setting the stage for incremental revenues in the near term and more substantial, recurring revenues as these products ramp into higher-volume applications in 2026 and beyond.
  
• Global initiatives to strengthen semiconductor supply chain resiliency and accelerate onshoring, especially in the US and Europe, are driving record fab construction and capital expenditures within Onto’s customer base. As leading manufacturers expand capacity to support AI and next-generation semiconductor platforms, Onto’s installed base and cross-selling opportunities are expected to grow, providing a multi-year uplift to both top-line revenue and long-term earnings growth.

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 11.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 21.4% today to 24.0% in 3 years time.
• The bullish analysts expect earnings to reach $344.4 million (and earnings per share of $6.91) 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 bullish analyst cohort, the company would need to trade at a PE ratio of 34.0x on those 2028 earnings, up from 21.6x today. This future PE is greater 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 9.47%, as per the Simply Wall St company report.

Onto Innovation Future Earnings Per Share Growth

Risks

• Rising geopolitical tensions, such as questions around tariffs and chip export restrictions, could disrupt Onto Innovation’s supply chains and limit access to overseas markets, posing risks to future revenue growth and demand visibility.
  
• The ongoing increase in R&D spending, driven by the need to rapidly innovate and meet customer requirements in process control and inspection, may put long-term pressure on net margins and earnings if new products fail to achieve strong commercial adoption.
  
• The high growth in Onto Innovation’s business is closely tied to a small set of leading-edge semiconductor and packaging customers; any slowdown, shift in customer capex, or adoption of internal process control solutions by these customers may lead to revenue cyclicality and affect top-line growth.
  
• Intensifying competition—including from larger, consolidated semiconductor equipment peers and strong incumbents in specific segments—could heighten pricing pressures and threaten Onto Innovation’s market share, negatively impacting both revenue and long-term profitability.
  
• Increasing environmental scrutiny and anticipated ESG compliance requirements may raise operating costs or limit expansion opportunities in key regions, thereby potentially reducing future 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 $344.4 million, and it would be trading on a PE ratio of 34.0x, assuming you use a discount rate of 9.5%.
• Given the current share price of $96.79, the bullish analyst price target of $190.0 is 49.1% 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.