Bull of the Day: Onto Innovation (ONTO)

Onto Innovation (ONTO) is a leading provider of process control, metrology, and inspection solutions for the global semiconductor industry. Headquartered in Wilmington, Massachusetts, the company was formed in October 2019 through a merger of equals between Nanometrics Incorporated and Rudolph Technologies. 

Today, Onto Innovation develops advanced hardware and AI-enabled software that allow semiconductor manufacturers to measure, analyze, and detect defects on silicon wafers and advanced packages, ensuring high yield and reliability in chip fabrication.

Target Markets & Product Strategy

Onto Innovation operates at the critical intersection of front-end semiconductor fabrication and back-end advanced packaging. Its solutions address several core markets...

Advanced Packaging & 2.5D/3D Logic: As chipmakers hit the physical limits of Moore’s Law, multi-die architectures (chiplets) have become essential. Onto’s inspection platforms ensure the integrity of interconnects in complex packages.

High-Bandwidth Memory (HBM): Crucial for AI accelerators, HBM requires precise metrology to align vertically stacked DRAM layers.

Specialty Devices & Silicon Photonics: The company provides film thickness and critical dimension (CD) metrology for RF devices, power electronics, and photonics used in optical networking.

Advanced Nodes: Onto delivers integrated metrology that allows customers to measure process variations directly on the die, improving yield in sub-5nm manufacturing.

Key Growth Drivers

The explosive demand for artificial intelligence infrastructure is Onto Innovation's primary catalyst. Traditional optical metrology is being pushed to its limits, creating distinct tailwinds for the company...

The AI Packaging Boom: Onto is a direct beneficiary of the rapid expansion in AI GPU production. The company's advanced packaging revenue has reached all-time highs, driven by demand for 2.5D logic (such as TSMC's CoWoS architecture) and high-bandwidth memory.

Dragonfly G5 Platform Ramping: Launched to address complex packaging inspection, the Dragonfly G5 platform has seen rapid adoption. Anticipated demand for the G5 is projecting over 50% growth through 2026 as customers pull forward orders to secure capacity for AI chip production.

Hybrid Metrology & AI: Onto is integrating AI-driven software to automate defect classification, pairing optical metrology with X-ray data to solve complex measurement challenges in next-generation memory and logic.

Customers & Strategic Partnerships

Onto Innovation serves the world’s most advanced semiconductor foundries, IDMs, and memory manufacturers...

Tier-1 Foundry & Memory Customers: While equipment suppliers maintain strict confidentiality regarding specific order flows, Onto's process control platforms are deeply embedded in the supply chains of the industry's heavyweights, including TSMC (TSM), Intel, and Samsung. The company's recent surge is closely tied to the massive capacity build-outs by foundries to support AI chip designers.

Rigaku Holdings Corporation: In August 2026, Onto completed a $710 million strategic investment for a 27% equity stake in Rigaku, a leading provider of X-ray technologies. This transformational partnership targets the estimated $1 billion market for hybrid metrology, combining Onto’s AI software and optical metrology with Rigaku's X-ray solutions (such as CD-SAXS) to deliver next-generation process control for advanced logic and V-NAND.

Why ONTO Tops the Zacks Rank

Onto Innovation has demonstrated robust fundamental execution, capitalizing on the semiconductor upcycle in 2026. The company delivered a strong Q2 report on August 6, including revenue of $343.1 million -- representing a 35.3% year-over-year increase -- and shares gapped up 14% the following day as analysts raised estimates and price targets.

The full year EPS consensus jumped 13% from $7.11 to $8.04, representing 63% annual growth vs 2025. And next year vaulted 17% from $10 to $11.72, for a potential advance of 46%.

With sales growing 35-40% toward $2 billion next year, the stock trades around 7.5X sales. That's attractive given the growth rates, and the recent initiation by Goldman was well timed as ONTO shares were finding support at $240 during the pre-Fed market pullback. Here were the post-earnings analyst moves...

Needham & Company's Charles Shi bumped his price target to $360 from $330.
Evercore ISI veteran NVIDIA analyst Mark Lipacis kicked his PT to $390 up from $350.
Jefferies & Company's Blayne Peter Curtis grabbed the high Street target at $400 from his prior $350.

And on August 17, Goldman Sachs analyst James E Schneider joined the party with a Strong Buy initiation and $400 valuation target.

Quarter Highlights

Margin Expansion: Non-GAAP gross margins expanded to 57.0% in Q2 2026, up from 54.5% in the prior year, reflecting a favorable product mix heavily weighted toward advanced packaging.

Earnings Power: Non-GAAP operating margins reached 30.0%, generating non-GAAP diluted EPS of $1.93 in Q2 2026.

Capital Position: The company ended Q2 2026 with a highly-liquid balance sheet, holding $1.88 billion in cash and short-term investments.

Competitive Landscape

Onto Innovation competes in a consolidated, highly technical market characterized by high barriers to entry.

KLA Corp (KLAC) is a direct competitor as the dominant incumbent in front-end wafer inspection and metrology. Onto successfully captures market share by focusing aggressively on back-end advanced packaging and specialty metrology niches.

Applied Materials (AMAT) is a broad competitor as the leader in deposition and etch, but it also competes in process control. AMAT has vast scale, but Onto remains more purely leveraged to the specific inspection requirements of advanced packaging.

Camtek (CAMT) is Onto's closest pure-play competitor in 2D/3D advanced packaging inspection. Both benefit from the same AI and HBM tailwinds, though Onto boasts higher overall revenue scale and a broader metrology portfolio.

Entegris (ENTG) & FormFactor (FORM) are considered adjacent peers. Entegris focuses on materials and contamination control, while FormFactor specializes in electrical test and probe cards. They operate in the same ecosystem and are often benchmarked together, but they generally do not compete head-to-head in optical inspection.

One of my favorite companies in the "test & measurement" space is Viavi (VIAV) which is coming out of a nice 2-month base in the mid-$30s. I own it for the Zacks TAZR Trader portfolio along with NVDA, TSM, Micron (MU), and Lumentum (LITE).

Bottom line: While I grabbed many bargains during the July "Leopold Leverage Liquidation," I mis-read the head-fake lower in the Semiconductor value chain before the Fed meeting. But it's clear now that the 3-headed Cerberus of Fed-Iran-Midterms is no match for the AI Transformation and so I'm looking for an entry in ONTO very soon. $280 would be a buy.

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This article originally published on Zacks Investment Research (zacks.com).

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