Author: Andres Veurink
Compiled by Deep潮 TechFlow
DeepChaohao Summary: Andres Veurink believes Onto Innovation is an undervalued process control play in the AI boom: installed base and backlog are expanding in tandem, demand for the Dragonfly G5 has exceeded expectations, and is poised to support approximately 30% annual revenue growth alongside sustained gross margin expansion. Based on conservative to optimistic scenarios, the five-year enterprise value upside ranges from 62.9% to 124%. A Strong Buy rating is recommended, with a small position to be initiated alongside this report.
Investment thesis
In my view, Onto Innovation (ONTO) resembles an overlooked manufacturing-side play in the AI boom. The company’s platform enjoys high adoption and is building a resilient revenue base that is difficult to disrupt, as it is deeply embedded in its customers’ production line operations.
The stock performance has actually been quite strong, merely retracing from its 52-week high of $386; in my view, this is now an attractive buying opportunity. What truly matters is the recurring revenue generated by the installed base—and this foundation continues to grow. Wafer demand has surpassed supply, making this more like a decades-long play.
I’ve always been picky about companies like Micron (MU), even giving them sell ratings in the past—primarily due to end-product pricing issues. ONTO, however, is betting on overall capacity expansion: it specializes in inspection and process control, helping factories maintain high yields. To me, ONTO is a clear, strong buy.
Business model
ONTO's origins trace back to the 2019 merger between Nanometrics and Rudolph Technologies. Today, its core business focuses on process control metrology, defect detection, and various data analysis systems, primarily covering three areas:
Defect detection
Measurement
Data analysis software
Reviewing SEC filings, revenue is broken down by category: systems and software, components, and services. Systems and software account for over 85% of total revenue and have consistently contributed more than 80% over the long term. The growth is not narrow-based: this category alone saw a year-over-year increase of over 37%, with components and services following the same trajectory, indicating that momentum is broadly distributed across all segments, not driven by a single area.
There has also been a slightly positive shift in customer structure: over a six-month period, the concentration among the top three customers has decreased, which is favorable given the current environment. On the product side, the Dragonfly platform is used for defect detection in wafers and advanced packaging—making the customer profile fairly obvious: semiconductor device manufacturers and pure-play foundries. The core of the company’s work is “identifying where problems occur”; as wafer production capacity expands, the range of applications continues to grow each year.
According to the materials disclosed by the company in January, all end markets are showing stronger year-over-year growth and have broad coverage. Taking the wafer market as an example, pure capacity is expected to grow approximately 5%–7% annually by 2031. More wafers require increased scanning and inspection, which translates to more business for ONTO and helps build a larger recurring revenue base through a growing installed base of tools.
Particularly notable is U.S. revenue, which surged 216% year-over-year on a six-month basis. This growth was driven by the CHIPS and Science Act, encouraging customers such as Intel (INTC), TSMC (TSM), and Samsung (SSNLF) to invest and expand production in the U.S. As long as these investments continue, I believe ONTO’s growth in this geographic segment will further accelerate; over the next 12 months, the U.S. is poised to surpass Taiwan as the company’s largest revenue source.
A business that keeps growing
The largest customer base is currently in the United States, Taiwan, and South Korea. Intel, TSMC, and Samsung are the primary customers—though not officially confirmed, this is easy to infer. Growth is highly concentrated in the United States; other regions have remained flat or declined.
The installed base corresponds to "components" plus "services"—these are the areas we should focus on for scaling. Their share of total revenue has declined only because systems and software have grown so rapidly. In dollar terms, installed-base-related revenue still increased by 25.5% year-over-year in the second quarter. I expect that as the industry continues to expand production, both of these segments will grow alongside it.
The second layer of recurring revenue is deferred revenue, which increased by 2.4% year-over-year, representing approximately 15% of the installed base. However, the truly durable asset is the "tool-of-record" status.
The cost for customers to switch is another layer of logic, giving these revenues an indirect recurring character. ONTO discloses that approximately 94% of its revenue is recognized at a point in time; with backlog and customer commitments rising so rapidly, this portion is unlikely to decline easily.
The figures above primarily come from ONTO's Q2 earnings call. What concerns me most is the backlog of orders and the company securing a major contract worth approximately $200 million for next year. This directly relates to customer loyalty: if giants like Intel, TSMC, or similar players are making such substantial commitments before delivery, it's hard not to question how costly it would be to switch suppliers or wait longer.
Perhaps the strongest argument is the pricing power ONTO has already demonstrated—gross margins have consistently expanded, even as backlog orders have rapidly grown.
Using KLA (KLAC) as a reference: its TTM gross margin is approximately 61.3%. ONTO is still below this level, but I’m not concerned—the company is still on an upward trajectory, and that’s what matters most right now.
Management stated that following the successful launch of the Dragonfly G5, the customer base has expanded and demand has surged, leading the company to raise its full-year advanced packaging growth outlook to approximately 80%, significantly higher than the 50% projected last quarter.
The current figures do not yet account for the impact of Dragonfly G5. According to management, demand is robust, and the probability of further gross margin expansion is very high—even surpassing or catching up to KLAC at some point cannot be ruled out.
Even if the gross margin ultimately does not exceed that of peers, market share continues to expand rapidly. By 2035, the relevant market is expected to reach $20.2 billion, with a compound annual growth rate of approximately 7.1% over the decade.
My Prediction and Conclusion
Before providing predictions, align on growth prospects. The company's revenue year-over-year, on a six-month basis, is approximately 22%, and compared to the end market, it is currently behind only one metric:
Measurement and Inspection Market: 7.1%–7.8%
Onto's HBM market opportunity: approximately 12% CAGR
Onto's advanced packaging serves a market with approximately 20% CAGR.
Onto's new transistor technology can serve a market of approximately 25%.
The figures are from the January material mentioned earlier. Currently, only the last item, ONTO, has not caught up, but I believe it’s not critical. On the other hand, KLAC’s TTM revenue growth is approximately 11.71%, with forward guidance at around 20.78%.
ONTO may still be lower than KLAC on a TTM basis (though not on a Q2 year-over-year basis), but it has already outperformed on forward-looking indicators. The consensus estimate of $3.25 billion in revenue by 2030 seems conservative to me.
My outlook for ONTO is that, especially with Dragonfly G5 scaling up next year and demand already strong, the company is poised to continue expanding at a pace of approximately 30%, with gross margins continuing to rise. The gross margin expansion of over 200 basis points in the second quarter, I view as indicative of the trajectory toward 2030. For operating expenses relative to revenue, I’ve applied a normalized ratio of 27%—this reflects the actual levels seen in the second quarter and first half of the year, and is also consistent with projections for 2025.
Based on this, EBIT in 2030 is approximately $1.479 billion. Using a more conservative 20% revenue CAGR, with the same ratios and margins, EBIT would be approximately $1.074 billion. With a sector valuation multiple of around 18x, I believe it is reasonable for ONTO to use the same multiple, corresponding to an enterprise value range of approximately $19.33–$26.62 billion.
Compared to today’s enterprise value, the upside potential is approximately 62.9%–124%. Over a five-year horizon, I can accept either outcome, so I assign ONTO a Strong Buy rating.
With the next earnings report still about two months away, there may not be many catalysts in the interim unless there’s an announcement expanding partnerships. I don’t expect the stock to rebreak its 52-week high before then. What truly matters is the impact of the Dragonfly G5 on the income statement: if revenue accelerates and margins keep pace, the market will likely rally behind this stock again. For now, I’m comfortable with my position and will open a small position alongside this publication.