Is Onto Innovation (ONTO) a High-Beta Semiconductor Play Worth the Dip?

The semiconductor sector has been one of the most dynamic corners of the market in 2025, driven by AI-driven demand for advanced packaging and next-generation chip architectures. Yet, Onto Innovation (ONTO), a key player in wafer inspection and process control tools, has lagged behind. Over the past 12 months, ONTO delivered a -8% return, underperforming the S&P 500's +17% growth and the broader semiconductor sector's robust momentum according to market analysis. This underperformance, however, may present a contrarian opportunity for investors willing to bet on long-term AI tailwinds and a potential sector rotation into undervalued semiconductor subsectors.

Recent Underperformance vs. Sector Volatility

ONTO's struggles are evident in its financials. Year-to-date revenue growth has been modest, with Q2 2025 reporting a 4.49% year-on-year increase, far below the 23% average of its competitors as per market data. Earnings per share (EPS) have also declined, with a 33.58% drop in a recent quarter according to financial reports. These metrics contrast sharply with the semiconductor sector's beta coefficient of 1.49 in January 2025, reflecting its heightened sensitivity to market movements amid AI-driven demand as research shows. ONTO, meanwhile, has shown divergent performance, with a beta coefficient suggesting it is a volatile stock that often diverges from sector trends according to analysis.

Despite these challenges, ONTO has demonstrated short-term resilience. For instance, it outperformed the S&P 500 by 2.84% in a single trading session in late 2025 according to market data, and a 33.68% gain in a specific time frame outpaced both the semiconductor sector and S&P 500 as reported. This duality-underperformance over the long term but occasional outperformance in shorter windows-highlights its high-beta nature and the potential for sharp rebounds if macroeconomic or sector-specific catalysts align.

Valuation Metrics: Overvalued or Fairly Priced?

ONTO's valuation appears mixed. Its P/E ratio of 44.8x as of December 2025 exceeds the semiconductor peer average of 38.5x and the industry benchmark of 36.4x according to financial analysis. This premium is further amplified by a price-to-book ratio of 3.95, above the sector's 3.23 as per market data. However, the PEG ratio-often a better gauge for growth stocks-offers a more nuanced view. At 0.99 to 1.08 according to market reports, ONTO's PEG suggests it is either fairly valued or slightly undervalued relative to its earnings growth prospects.

Analysts have also noted that ONTO's P/E ratio is only modestly above its calculated fair value of 42.4x according to valuation analysis, indicating that while it trades at a premium, it is not drastically overvalued. This aligns with a Zacks Rank of #2 (Buy) as of December 2025, reflecting improving near-term sentiment as reported. Recent analyst revisions, including B. Riley's price target hike from $173 to $180 while maintaining a "Buy" rating according to market data, further underscore confidence in the company's ability to regain traction.

AI Tailwinds and Strategic Positioning

The long-term case for ONTO hinges on its role in AI-driven semiconductor manufacturing. The company specializes in inspection, metrology, and process control tools critical for advanced nodes like second-generation gate-all-around logic and vertical gate DRAM architectures as analysts note. Its recent launch of the Atlas G6 optical critical dimension metrology system has secured production orders from leading manufacturers, positioning it to benefit from the AI semiconductor boom as market data shows.

Financially, ONTO has demonstrated resilience. Over the past three years, it has achieved a 3.9% revenue CAGR and a 15.5% growth rate in the past year, supported by 53.5% gross margins and 23% free cash flow margins according to financial reports. Analysts expect a reacceleration of growth in the back half of 2025 as the company regains market share in technologies like chip-on-wafer-on-substrate as analysts predict. This aligns with broader industry trends, as global semiconductor sales are projected to reach $728 billion in 2025 according to market projections, driven by AI and advanced packaging.

Risks: Capex Cycles and Competitive Pressures

Despite these positives, risks remain. ONTO operates in a capital-intensive industry, with significant capex required to maintain technological leadership. Competitors like Amkor Technology and Nova, which have lower P/E ratios of 31.7x and 39.7x, respectively according to financial data, could outpace ONTO in revenue growth if it fails to execute on its innovation roadmap. Additionally, the company's Q3 2025 revenue of $218.2 million-a 13.5% decline year-on-year-highlights near-term execution challenges as reported in earnings.

Conclusion: A Contrarian Play in a High-Beta Sector

ONTO's recent underperformance, coupled with its strategic positioning in AI-driven semiconductor manufacturing, presents a compelling case for contrarian investors. While its valuation metrics suggest a modest premium, the PEG ratio and Zacks Rank indicate that the stock is not overvalued relative to its growth potential. Analysts' upward revisions and the company's participation in key technologies like advanced packaging further strengthen the case for a long-term hold.

However, investors must weigh these opportunities against the risks of capex cycles and competitive pressures. For those comfortable with high-beta exposure and a longer time horizon, ONTO could offer a compelling entry point as the semiconductor sector continues to rotate toward AI-driven subsectors.