Onto Innovation (ONTO): A Resilient Contender in the Semiconductor Equipment Sector Amid Cyclical Corrections

The semiconductor equipment sector, known for its cyclical nature, has faced significant volatility over the past five years. Market corrections, driven by macroeconomic uncertainty, inventory overhangs, and shifting demand for chips, have tested the mettle of even the most established players. Yet, Onto Innovation (ONTO) has emerged as a standout, consistently outperforming both the broader market and its peers during downturns. This article examines why ONTO's strategic positioning, operational resilience, and long-term growth drivers make it a compelling investment amid the semiconductor industry's cyclical turbulence.

Navigating Downturns: A Track Record of Resilience

From 2020 to 2025, Onto Innovation has demonstrated an ability to weather market storms while maintaining robust financial performance. During the 2020 pandemic-induced downturn, when global supply chains faltered and demand for electronics dipped, ONTO's stock plummeted by 53% from its 2024 peak. However, the company's underlying fundamentals remained strong: it reported record quarterly revenue of $267 million in Q1 2025, driven by demand for advanced nodes and 3D packaging solutions. This growth was underpinned by a GAAP gross margin of 54% and non-GAAP gross margin of 55%, reflecting pricing power and operational efficiency.

In contrast, many of ONTO's peers, such as Applied Materials and Amkor Technology, experienced sharper declines in both stock price and revenue during similar periods. For instance, Applied Materials' shares fell by 10.45% over the past year, while Amkor's dropped 17.80%. ONTO's ability to maintain a 13.4% annualized revenue growth rate (compared to the sector's 11.6%) underscores its competitive edge.

Strategic Positioning in High-Growth Segments

Onto Innovation's outperformance stems from its focus on high-growth segments within the semiconductor value chain. The company is a leader in metrology, inspection, and lithography tools critical for advanced packaging and gate-all-around (GAA) technologies—areas poised to benefit from AI-driven demand and the industry's shift toward heterogeneous integration.

In Q1 2025, ONTO's advanced nodes revenue surged 100% quarter-over-quarter, and its Iris™ film metrology sales rose 25%. Strategic acquisitions, such as the $540 million purchase of Semilab's materials analysis business, have further expanded its capabilities in 3D packaging and materials science. These moves position ONTO to capitalize on the $200 billion semiconductor equipment market's projected growth, driven by AI infrastructure and next-gen chip architectures.

Valuation Metrics: Attractive Entry Point

Despite recent volatility, ONTO remains undervalued relative to its growth prospects. The stock trades at a forward P/E ratio of 18.92, in line with the semiconductor equipment sector average, but its PEG ratio of 0.63—well below peers like ASML (1.64) and KLA (1.13)—suggests the market is underestimating its long-term potential. Analysts project 3.06% year-over-year revenue growth for 2025, with earnings expected to stabilize as AI and 5G adoption accelerates.

Long-Term Catalysts: AI, 5G, and Advanced Packaging

The semiconductor industry is entering a new phase, with AI and 5G driving demand for chips with higher performance and lower power consumption. Onto Innovation's expertise in advanced packaging—such as 2.5D and 3D interconnects—positions it to benefit from this shift. For example, its Packaging Applications Center of Excellence (PACE) initiative is already enabling collaboration with manufacturers on next-generation 3D architectures, a $12 billion market expected to grow rapidly through 2030.

Moreover, ONTO's recent product launches, including the Firefly G3 Inspection and Metrology System, highlight its innovation pipeline. These tools address critical bottlenecks in wafer-level processing, enhancing yield rates and reducing time-to-market for cutting-edge chips.

Investment Thesis: Balancing Risk and Reward

While ONTO's stock has faced near-term headwinds—a 13.5% pullback from its 52-week high and a projected 3.79% decline in Q2 2025 EPS—it remains a compelling long-term opportunity. The company's strong cash flow generation ($92 million in Q1 2025) provides flexibility for R&D and strategic M&A, while its leadership in advanced packaging aligns with multi-year industry trends.

For investors, the key is to balance short-term volatility with the company's long-term trajectory. Analysts maintain a “Moderate Buy” rating, with a projected 44% upside to $141.67. Dollar-cost averaging into the stock during dips could mitigate near-term risks while capturing growth from AI-driven demand and industry consolidation.

Conclusion: A Resilient Player in a Cyclically Driven Sector

Onto Innovation's ability to outperform during market corrections, coupled with its strategic alignment with high-growth segments, makes it a standout in the semiconductor equipment sector. While cyclical headwinds will persist, the company's robust financials, innovative product pipeline, and expanding market share position it to deliver superior returns over the long term. For investors seeking exposure to the next wave of semiconductor innovation, ONTO offers a compelling mix of resilience and growth potential.