Onto Innovation’s ONTO shares have lost 12.8% in the past month, which is narrower than the Nanotechnology industry’s decline of 14.2%. Over the same time frame, the Zacks Computer and Technology sector and the S&P 500 composite have registered declines of 6.7% and 4.9%, respectively. Escalating trade tensions and tariff troubles have been a drag on the overall market performance.  

Price performance

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ONTO stock inched up 0.3% in the last trading session and closed at $120.47. The stock is trading 50% below its 52-week high of $238.93, reached on July 16, 2024.  When a stock is trading much below 52-week high, it can either be a golden opportunity or a value trap. 

Investors looking to invest or already holding the stock must be contemplating how to play ONTO stock given its low price relative to 52-week high.

Let us understand the company’s fundamentals and ascertain the best course of action for your portfolio.

ONTO’s Growth Drivers

As the complexity of leading devices is rapidly increasing, manufacturers and fabless companies need better ways to measure physical features such as film thickness and feature sizes. Equipped with a best-in-class suite of semiconductor materials, Onto Innovation is focused on process control and well positioned to capitalize on almost every aspect of the semiconductor industry, including 5G, 3D NAND and advanced packaging.

The industry's transition to 3D NAND is helping the company to further expand the available market. To strengthen its foothold, Onto launched innovative products in 2024 designed to support next-generation 3D interconnect technology and inspection tools for unpatterned wafers, panel-level packaging and compound semiconductors.

Onto Innovation delivered a strong performance throughout 2024, with the fourth quarter being its sixth consecutive quarter of growth. AI-driven semiconductor packaging is a rapidly growing market and Onto Innovation has capitalized on this emerging trend with cutting-edge solutions. The 180% year-over-year growth in AI-packaging revenues for 2024 highlights robust demand for Onto’s metrology and inspection tools. AI packaging was Onto's top market for the quarter, fueled by significant growth in shipments supporting 2.5D Logic packaging.

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Advanced nodes continue to drive Onto Innovation’s revenue growth. Driven by four consecutive quarters of growth in this segment, ONTO projects momentum to persist in 2025 as well. During the fourth quarter, both logic and memory gained traction, with the maximum increase in gate-all-around revenues nearly doubling from the previous quarter.

In addition to the growth of Atlas OCD tools, demand for Iris film metrology rose, driven by successful qualifications in memory, logic and packaging, bringing annual revenues close to $100 million. ONTO expects continued demand for Iris films in 2025 with the expansion of its customer base and market footprint.

Power revenues increased 10% in 2024, despite weak end-market demand led to delays in several customer expansions. As the demand for power usage elevates among data centers, ONTO is focused on developing advanced gallium nitride-based power semiconductors that are gaining traction due to their advantages in power efficiency, compact size and higher density compared with silicon.

For 2025, management expects total revenues in this segment to surpass the record set in 2024. It anticipates a seasonal dip in the first quarter, followed by rise in the subsequent quarters, aligning with the growth trends seen in 2024. In support of a $69 million volume purchase deal with a top DRAM manufacturer, management forecasts strong revenue growth in DRAM in the first quarter. Followed by a solid fourth-quarter performance, gate-all-around demand is expected to rise, while increased NAND orders are likely to support expansion and the growing need for high-stack 3D NAND.

Given these drivers, management expects revenues in the range of $260-$274 million for the first quarter of 2025. Non-GAAP earnings per share are projected to be between $1.40 and $1.54.

Challenges Loom for ONTO

Non-GAAP operating expenses totaled $68.4 million, up 21.4% year over year. The metric reached the upper end of the guidance on higher R&D investments throughout the quarter. While R&D is crucial for long-term competitiveness, the increasing expense base could weigh down on profitability, especially if revenue growth stalls or macro conditions worsen.

Uncertain macro backdrop and escalating geopolitical/trade tensions could upset supply chains and impact the semiconductor industry. This does not bode well for ONTO.

Intense competition in the semiconductor vertical and forex volatility are additional concerns.

Analysts remain cautious, as witnessed in the downward earnings estimate revision activity over the past 60 days.

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ONTO’s Expensive Valuation

ONTO stock is trading at a premium with forward 12-month price/earnings multiple of 18.03X compared with the industry’s 3.70X. 

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Conclusion: Hold ONTO for Now

While Onto Innovation has strong structural tailwinds, its near-term investment profile is clouded by uncertain global macro backdrop, geopolitical and trade tensions along with intense competition. Increasing operating costs also emerge as a concern.

Therefore, we believe new investors should wait for a better entry point and existing investors should retain ONTO stock, which currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks worth consideration in the broader technology space are Broadcom AVGO, Cisco Systems, Inc. CSCO and NETGEAR Inc NTGR. While AVGO flaunts a Zacks Rank #1 (Strong Buy), CSCO and NTGR presently carry a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Broadcom’s fiscal 2025 earnings is pegged at $6.60 per share, unchanged in the past seven days. Broadcom’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 3.44%.

The Zacks Consensus Estimate for Cisco’s fiscal 2025 earnings is pegged at $3.72 per share, unchanged in the past seven days. Cisco’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 4.07%.

The Zacks Consensus Estimate for NETGEAR’s 2025 bottom line is pegged at a loss of 75 cents, unchanged in the past seven days. NETGEAR’s earnings beat the Zacks Consensus Estimate in three of the trailing four quarters, while missing once, with the average surprise being 151.77%. 

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