Onto Innovation Inc. ONTO stock has proved to be resilient amid a volatile market environment with a 29.9% gain in the past month, outperforming its industry growth of 27.8%. Headquartered in Wilmington, MA, Onto Innovation specializes in design, development, manufacture and support of metrology and inspection tools primarily for semiconductor device fabricators, silicon wafer manufacturers and advanced packaging manufacturers in the semiconductor space.

It has also outperformed the Zacks Computer and Technology sector and the S&P 500 composite’s growth of 0.7% each. The stock has risen 10.5% in the past three months.

Image Source: Zacks Investment Research

It closed the last session at $224.50, down from its 52-week high of $238.93. Does this recent pullback indicate a buying opportunity? Let us evaluate the pros and cons of ONTO and decide the best course of action for your portfolio.

ONTO’s Dragonfly Inspection System Holds Promise

Onto Innovation’s performance is gaining from increasing demand for its Dragonfly inspection system. Its Dragonfly G3 platform integrates 2D and 3D technologies to identify yield-killing defects and compute features, which are important for advanced front-end and packaging technologies. This system is witnessing strong adoption owing to higher demand for advanced packaging of artificial intelligence (AI) computing devices.

In the third quarter, the company delivered a strong performance, achieving a record-breaking $252 million in revenues for its inspection segment driven by its Dragonfly platform. The company remains on track to almost double its inspection revenues for 2024.

AI packaging revenues drove growth in the specialty device and advanced packaging markets, particularly in high-bandwidth memory, which nearly offset the anticipated decline in 2.5D logic packaging. Going forward, management anticipates higher volumes in logic packaging and increased capital intensity for process control to manage growing complexity and demand for higher yields.

On Jan. 14, 2025, Onto Innovation secured a $69 million volume purchase deal with a top DRAM manufacturer. The deal spans ONTO’s rich portfolio of common films, optical critical dimension and integrated metrology solutions. It also announced key advancements in its product suite for 3D interconnect process control, unveiling the 3Di technology on the Dragonfly G3 system and the new EchoScan system.

ONTO’s Strategic Acquisitions and Innovations Bode Well

ONTO continues to drive growth with strategic acquisitions. By acquiring Lumina Instruments, ONTO plans to boost its inspection business, which has been a key revenue growth driver. Lumina specializes in laser-based inspection for unpatterned wafers and emerging panel applications. Lumina’s patented technology enables high-sensitivity scanning of silicon carbide and gallium nitride, as well as glass substrates and carriers in advanced packaging. This complements the pattern inspection capabilities, addressing critical defect detection and expanding its SAM by $250 million annually within three years.

In October 2024, Onto Innovation acquired the lithography business from Kulicke and Soffa Industries, Inc., obtaining key intellectual property, including 24 issued patents and eight pending ones, along with a highly experienced team with more than 200 combined years in lithography and wafer applications. This acquisition bolsters ONTO’s JetStep panel lithography development and enhances its overall metrology and lithography expertise. Management forecasts these two major acquisitions to generate up to $100 million in additional annual revenues over the next three years and be accretive to earnings within a year.

ONTO Faces a Few Challenges

Onto Innovation faces high concentration risks as most of its revenues are generated from few high-profile customers. The company operates in a capital-intensive semiconductor device manufacturing industry. This, along with macroeconomic turbulence, remains concerning.

Significant foreign market exposure, geopolitical turmoil and strained U.S.-China trade relations pose additional headwinds. Limited visibility in customer demand and volatile supply chains can affect production and inventory planning.

High R&D costs and rapid technological obsolescence increase operating expenses, straining profitability. In the last reported quarter, non-GAAP operating expenses were $67.5 million, up 17.8% from $57.3 million in the prior-year quarter, owing to higher R&D spending to augment its 3D metrology capabilities for advanced packaging applications.

ONTO’s Expensive Valuation

ONTO’s stock is trading at a premium, with a forward 12-month Price/Earnings of 34.39X compared with the industry’s 6.76X.

Image Source: Zacks Investment Research

How Should Investors Play ONTO Stock?

With a Zacks Rank #3 (Hold), ONTO appears to be treading in the middle of the road. Strength in the Dragonfly system and emerging business opportunities driven by higher demand for advanced packaging of AI computing devices bode well for ONTO.

However, customer concentration risks and macroeconomic headwinds are concerns. Moreover, volatile supply-chain disruptions could affect its financial performance.

Stocks to Consider

Some better-ranked stocks from the broader technology space are BlackBerry Limited BB, InterDigital, Inc. IDCC and Intrusion Inc. INTZ. BB presently sports a Zacks Rank #1 (Strong Buy), whereas IDCC & INTZ carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

BlackBerry’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 131.25%. In the last reported quarter, BB delivered an earnings surprise of 200%. Its shares have surged 70% in the past six months.

The Zacks Consensus Estimate for InterDigital’s 2024 earnings per share is pegged at $15.19, unchanged in the past 30 days. IDCC earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 163.7%. The company’s long-term earnings growth rate is 15%. Its shares have jumped 42.2% in the past six months.

INTZ’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 43.06%. In the last reported quarter, Intrusion delivered an earnings surprise of 16.67%. Its shares have surged 70.3% in the past six months.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

InterDigital, Inc. (IDCC) : Free Stock Analysis Report

BlackBerry Limited (BB) : Free Stock Analysis Report

Intrusion Inc. (INTZ) : Free Stock Analysis Report

Onto Innovation Inc. (ONTO) : Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research