AI Packaging And Semilab Acquisition Will Drive Expansion

Key Takeaways

• Surging demand for advanced chip packaging and new architectures is driving strong growth, higher margins, and increased market share for Onto Innovation.
  
• Strategic acquisitions and regional manufacturing initiatives are expanding capabilities, reducing risk, and boosting earnings, while robust end-market trends support long-term revenue acceleration.
  
• Heavy dependence on customer demand rebound, exposure to geopolitical risks, revenue concentration, high R&D costs, and acquisition integration challenges threaten long-term revenue and margin stability.

Catalysts

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

• The accelerating adoption of AI packaging and advanced 2.5D/3D logic architectures is driving a major step up in demand for Onto Innovation's next-generation Dragonfly systems, with strong customer pull and new applications expanding both revenue and potential gross margin through higher ASPs and increased market share within leading-edge chip production.
  
• The pending Semilab acquisition will immediately expand Onto's product portfolio into electrical surface metrology and materials analysis-capabilities specifically in demand as industry transitions to exotic materials and heterogeneous integration-enabling both direct revenue accretion (~$130M annualized) and gross/operating margin uplift, further increasing earnings per share by 10%+ in the first year post-deal.
  
• Regional manufacturing initiatives ("region-for-region" strategy) are supporting operational resilience and mitigating future tariff exposure, ensuring more reliable global delivery while lowering cost of goods and preserving gross margin, with the impact expected to show up in improved net margins in 2026.
  
• Market commentary indicates a sharp Q4 rebound in both AI packaging and advanced node spending, with specialty device and advanced packaging revenue expected to approach previous peak levels and advanced node revenue anticipated to almost double in 2025 vs. 2024-suggesting the near-term revenue dip is temporary and masking underlying demand strength, with a setup for outsized top-line growth.
  
• Onto's ongoing penetration into new applications (e.g., co-packaged optics, die stacking, wafer bonding) and increasing wallet share at key customers reflect the company's ability to capitalize on the proliferation of connected devices and electrification trends, enhancing revenue diversification and resilience while supporting both revenue stability and margin expansion.

Onto Innovation Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Onto Innovation's revenue will grow by 11.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.3% today to 21.9% in 3 years time.
• Analysts expect earnings to reach $311.2 million (and earnings per share of $7.09) by about September 2028, up from $199.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.1x on those 2028 earnings, down from 25.5x today. This future PE is lower than the current PE for the US Semiconductor industry at 33.5x.
• Analysts expect the number of shares outstanding to decline by 0.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.97%, as per the Simply Wall St company report.

Onto Innovation Future Earnings Per Share Growth

Risks

• The significant reliance on a rebound in customer demand, especially in AI packaging and advanced nodes for the fourth quarter and 2026, exposes Onto Innovation to the risk of a cyclical downturn or delays in customer spending, which could negatively impact revenue and earnings if the anticipated rebound fails to materialize as strongly or as quickly as forecasted.
  
• The company faces persistent geopolitical risks and tariff exposure, with ongoing uncertainties surrounding global trade regulations and tariffs-particularly after mentioning recent 100% tariffs announcements-which could disrupt supply chains or increase costs, thereby pressuring gross margins and net earnings, especially if mitigation strategies do not fully succeed.
  
• Onto's business performance remains closely tied to a small number of major customers in high-growth segments (like AI logic packaging and HBM), and a failure to diversify more broadly may lead to revenue concentration risks; any shift of customer preference toward alternative vendors or in-house solutions could reduce long-term revenue stability.
  
• The need to maintain high R&D investment to keep pace with rapid advances in semiconductor technology and customer requirements (e.g., new architectures, advanced packaging, evolving materials) could exert ongoing pressure on net margins if revenue growth slows or if new products (like the next-gen Dragonfly) do not achieve expected market adoption.
  
• Integration risks associated with the Semilab acquisition, including realizing anticipated synergies and new product expansion into advanced nodes and packaging, may not materialize as projected; should integration falter or cross-selling opportunities disappoint, the anticipated accretive impact on both revenue and EPS could be mitigated, affecting long-term earnings growth.

Valuation

• The analysts have a consensus price target of $125.0 for Onto Innovation based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $160.0, and the most bearish reporting a price target of just $90.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.4 billion, earnings will come to $311.2 million, and it would be trading on a PE ratio of 25.1x, assuming you use a discount rate of 10.0%.
• Given the current share price of $104.21, the analyst price target of $125.0 is 16.6% 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.