Onto Innovation is emerging as one of the most strategically important semiconductor equipment companies in the AI supply chain. While much investor attention remains focused on GPU manufacturers and memory suppliers, the next bottleneck increasingly lies in advanced packaging — the complex process of stacking, connecting, and inspecting AI chips and HBM memory at nanometer precision.
As AI models become larger and more compute-intensive, technologies such as CoWoS, SoIC, and HBM stacking are becoming essential. These advanced packaging methods require highly specialized metrology and inspection tools to maintain yield and reliability.
Onto Innovation appears to be positioned directly at this bottleneck.
The company’s Dragonfly platform recently passed TSMC’s New Tool Selection Committee qualification process for 2.5D advanced packaging applications — a significant milestone that could materially expand Onto’s role in the semiconductor ecosystem over the next several years.
According to TSMC, advanced packaging demand is expected to grow roughly 30% annually as AI accelerators require increasingly complex chip architectures.
The AI Packaging Bottleneck
The semiconductor industry is undergoing a structural shift.
Historically, scaling performance primarily depended on shrinking transistor sizes. Today, physical scaling limitations are pushing the industry toward advanced packaging approaches where multiple chips are interconnected in stacked or side-by-side configurations.
This transition dramatically increases the importance of process control and inspection.
A single defect in HBM stacking or CoWoS packaging can destroy an extremely expensive AI accelerator package. Yield losses at leading-edge fabs can reportedly cost hundreds of millions of dollars per quarter.
That is where Onto’s tools become mission-critical.
The company specializes in optical metrology and defect inspection systems designed specifically for advanced semiconductor packaging environments. Dragonfly G5 systems are capable of sub-nanometer stack height measurements using proprietary coherence scanning interferometry technology.
Importantly, production throughput appears to remain competitive even at these precision levels — a major differentiator in high-volume manufacturing.
Strong Positioning in HBM and Advanced Packaging
Onto already maintains exposure to NAND and HBM process control markets, positioning the company directly within the AI memory supply chain.
As memory manufacturers such as SK hynix, Samsung Electronics, and Micron Technology continue ramping HBM capacity, advanced packaging inspection requirements are expected to increase substantially.
The company also reportedly secured a volume purchase agreement exceeding $240 million with a leading HBM manufacturer extending through 2027.
This matters because advanced packaging is increasingly becoming a chokepoint no AI chip manufacturer can bypass.
Unlike traditional semiconductor cycles that depend heavily on PC or smartphone demand, AI infrastructure buildouts require massive quantities of advanced packaging capacity. Without precise inspection and metrology tools, yields deteriorate rapidly.
The Moat
Onto’s moat appears to come from both technology and qualification barriers.
The company’s proprietary 3Di metrology technology enables sub-nanometer measurements for advanced packaging structures. Replicating this capability at production scale is extremely difficult.
Qualification cycles at leading-edge fabs also create significant barriers to entry.
Once a tool is qualified inside a major foundry production process, switching vendors becomes risky and expensive. Process requalification can take 12–18 months or longer, especially at advanced nodes.
TSMC qualification therefore represents more than just a single customer win — it potentially establishes Onto as part of the long-term AI packaging ecosystem.
The company also offers factory analytics software layers that integrate with inspection hardware, creating additional switching costs and process optimization benefits.
Catalysts & Outlook (12–24 Months)
Several potential catalysts could drive Onto’s next growth phase.
TSMC Production Ramp
Volume shipments for Dragonfly G5 systems are expected to begin during mid-2026, with revenue contributions potentially accelerating during the second half of the year.
Given TSMC’s aggressive AI-related capacity expansion, investors will likely monitor packaging-related capex closely.
HBM Capacity Expansion
HBM demand remains one of the strongest trends across semiconductors.
As AI GPU shipments rise, memory suppliers will require increasingly sophisticated process control solutions. Onto appears highly leveraged to this trend.
Margin Expansion
Onto’s business model carries significant operating leverage.
Q1 2026 revenue reached approximately $291.9 million, while non-GAAP gross margins remained strong near 55.7%.
If advanced packaging revenue accelerates materially, operating margins could expand faster than revenue growth itself.
Some analyst projections currently estimate EPS reaching roughly $9–$10 by 2027.
Product Portfolio Expansion
The acquisition of Semilab USA expands Onto’s process control capabilities into surface charge metrology and gate oxide applications.
This broadens the company’s exposure beyond packaging alone and deepens its position within semiconductor process control.
Why Some Investors See a Structural Re-Rating
Onto currently trades at a discount to larger semiconductor process-control peers such as KLA Corporation and Applied Materials despite potentially having stronger exposure to advanced AI packaging growth.
Many investors believe the market still views Onto as a cyclical semiconductor equipment company rather than a strategic AI infrastructure provider.
However, the economics of advanced packaging may increasingly resemble infrastructure monopolies rather than traditional semiconductor capital equipment markets.
If Onto successfully scales Dragonfly deployments across leading fabs, the company could potentially experience a non-linear revenue expansion over the next several years.
Some bullish investors argue that applying peer-level valuation multiples to projected 2027 earnings could support valuations in the $360–$400 range.
SK hynix Parallel
Onto’s positioning resembles infrastructure suppliers embedded at critical industry bottlenecks.
Just as HBM memory became indispensable for AI acceleration, advanced packaging metrology may become indispensable for maintaining acceptable yields.
Without process control tools capable of detecting nanometer-level packaging defects, AI chip economics deteriorate rapidly.
This creates strong switching costs and potentially inelastic demand characteristics.
Bear Risks
Risks remain significant.
The company must execute flawlessly as Dragonfly deployments scale. If packaging demand growth slows or customer ramps are delayed, valuation expectations could compress sharply.
Competition is also intensifying.
KLA possesses substantially larger R&D resources and may expand more aggressively into advanced packaging metrology. A major technological breakthrough from competitors could pressure Onto’s market share and pricing power.
Geopolitical risks are another major factor.
Potential tightening of U.S. export restrictions on advanced semiconductor packaging equipment could impact future China-related revenue opportunities.
Finally, Onto remains exposed to semiconductor capital expenditure cycles.
If hyperscalers reduce AI infrastructure spending or if AI demand weakens materially, semiconductor equipment orders could slow quickly.
Investment Perspective
Onto Innovation appears increasingly positioned as a critical infrastructure provider within the AI semiconductor ecosystem.
The company combines several attractive characteristics:
- Exposure to AI and HBM growth
- High-margin process control economics
- Qualification-driven barriers to entry
- Potential operating leverage from packaging scale
- Strategic positioning at an industry bottleneck
While risks surrounding competition, export controls, and semiconductor cyclicality remain important, many investors believe the current valuation does not fully reflect Onto’s role in the future of AI packaging infrastructure.
Conclusion
The AI semiconductor race is no longer only about who designs the fastest chips.
Increasingly, success depends on who can package, stack, inspect, and manufacture those chips reliably at scale.
Onto Innovation appears to be positioning itself directly inside this critical bottleneck.
If advanced packaging demand continues accelerating alongside AI infrastructure growth, Onto could evolve from a relatively niche semiconductor equipment supplier into one of the most strategically important process-control companies in the AI era.
For long-term investors, the key question may no longer be whether advanced packaging grows — but rather how much of that ecosystem Onto ultimately controls.The logic behind the valuation is:
- 2027 EPS estimate: $9–$10
- Applying a peer-like multiple similar to high-quality process-control companies such as KLA Corporation:
10×40=400
That gives:
- $9 EPS × 40x P/E = $360
- $10 EPS × 40x P/E = $400
The article also argues ONTO deserves a higher multiple because of:
- stronger exposure to AI advanced packaging,
- TSMC qualification,
- HBM leverage,
- and potential sole-source positioning.
So the text’s implied “intrinsic value” would likely be presented around:
US$380 fair value
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