Onto Innovation (ONTO) has been experiencing a surge in its share price, with a notable 30.3% gain year-to-date, outperforming both the S&P 500 composite (14.1%) and its sub-industry (28.5%). This upward trajectory is largely attributed to the company’s strong financial performance. Since announcing its second-quarter fiscal 2024 results on August 8th, the stock has gained an additional 12%.
ONTO has consistently exceeded earnings estimates for the past four quarters, with an average surprise of 6.6%. While currently trading 16.7% below its 52-week high of $238.13, the stock still exhibits significant upside potential. Based in Wilmington, MA, Onto Innovation specializes in the design, development, manufacturing, and support of metrology and inspection tools primarily catering to semiconductor device fabricators, silicon wafer manufacturers, and advanced packaging manufacturers within the semiconductor industry.
The driving force behind ONTO’s robust performance is the escalating demand for its Dragonfly inspection system. The Dragonfly G3 platform seamlessly integrates 2D and 3D technologies to pinpoint yield-killing defects and analyze intricate features, proving crucial for cutting-edge front-end and packaging technologies. The system’s adoption is experiencing a surge due to the growing demand for advanced packaging within AI computing devices.
During the most recent quarter, ONTO’s total revenue reached $242.3 million, surpassing the Zacks Consensus Estimate by 2.9% and showcasing a 27.1% year-over-year expansion. This surge was primarily driven by the expansion of pilot lines for high-performance computing, which incorporates advanced gate-all-around transistor architecture and high-bandwidth memory to cater to the burgeoning AI sector. Revenues exceeded the company’s projected range of $230-$240 million, reaching record highs.
Furthermore, ONTO reported record revenues of $164 million from its specialty and advanced packaging customers. This growth is directly linked to demand from the company’s AI packaging clientele. The company has secured over $300 million in volume purchase agreements from two major customers. These agreements, extending through 2025, underscore significant investments in AI advanced packaging and gate-all-around technologies.
The momentum in sales for advanced nodes is fueled by the success of ONTO’s Atlas and Iris systems, which play a pivotal role in supporting emerging gate-all-around devices. Expanding its product portfolio, ONTO introduced the JetStep X500 lithography tool specifically designed for next-generation glass substrates used in panel-level packaging. These sensors will empower users to gather critical data necessary for process maturation within a shorter timeframe.
ONTO remains focused on reducing inventory levels to boost cash flow performance. Anticipated improvements in supply chain initiatives are expected to positively impact margin performance. The company projects revenues for the third quarter to fall within the range of $245-$255 million. For the second half of 2024, ONTO anticipates revenues to be 5-10% stronger compared to the first half of the year. Driven by increased investments in gate-all-around capacity and expansions by several high-bandwidth memory and logic packaging manufacturers, ONTO expects revenue growth to continue into 2025.
Despite the positive outlook, ONTO faces certain headwinds. Weak global macroeconomic conditions, fluctuating foreign exchange rates, and intense competition remain concerns for the company, currently ranked #3 (Hold) by Zacks. Rising expenses are likely to put pressure on margin performance, with the company forecasting operating expenses between $64-$66 million for the third quarter of 2024, driven by higher research and development expenditures.
The Zacks Consensus Estimate for ONTO’s 2024 and 2025 revenues stands at $968.9 million and $1.1 billion, respectively, indicating growth of 18.8% and 13.4% from the previous year. The consensus estimates for 2024 and 2025 EPS suggest a rise of 37% and 22%, respectively, from the prior-year figures to $5.11 and $6.24. The consensus mark for 2024 EPS has increased by 2% over the past 90 days.
While ONTO presents a compelling investment opportunity, investors may also consider other promising technology stocks. Badger Meter (BMI) and Manhattan Associates (MANH) both hold a Zacks Rank #1 (Strong Buy), while ANSYS (ANSS) boasts a Zacks Rank #2 (Buy). Badger Meter’s 2024 EPS is projected at $4.06, showing a 4.4% increase over the past 30 days. The company has consistently exceeded earnings estimates in recent quarters, with an average surprise of 12.9%. BMI’s long-term earnings growth rate is 17.9%, and its shares have gained 17.1% over the past year.
ANSYS’ 2024 earnings are projected at $9.72, showing a 3.7% increase over the past 30 days. ANSS has surpassed earnings estimates in three out of the last four quarters, with an average surprise of 4.8%. Its shares have increased by 7.7% over the past year. Manhattan Associates’ 2024 EPS is estimated at $4.26. MANH has consistently exceeded earnings estimates for the past four quarters, with an average surprise of 26.6%. The stock has seen a significant surge of 30.7% over the past year.
