Onto Innovation: Can Revenue Growth Outpace Earnings Pressure in a Shifting Semiconductor Landscape?

The semiconductor equipment sector is no stranger to volatility, but Onto Innovation (ONTO) has painted a mixed picture in Q2 2025. While the company's revenue growth has shown resilience, its profitability metrics tell a different story. Investors must now weigh whether Onto's improving top-line performance can offset declining margins and reignite confidence in a stock that has underperformed the broader market by nearly 46% year-to-date.

Revenue Growth vs. Margin Compression: A Tale of Two Metrics

Onto Innovation reported Q2 2025 revenue of $253.6 million, a 5% year-over-year increase, with first-half 2025 revenue hitting $520.2 million—a 10% rise compared to the same period in 2024. This growth is driven by strong demand for advanced packaging and AI-related tools, particularly in 3D NAND and logic chip production. The company's Dragonfly 3Di metrology system, for instance, has seen robust adoption, signaling its relevance in the AI-driven semiconductor revolution.

However, profitability has deteriorated. Gross margin fell to 48.2% in Q2 2025 from 52.9% in Q2 2024, while operating income dropped to $32.2 million (12.7% of revenue) from $48.8 million (20.2% of revenue) a year earlier. Non-GAAP operating income improved slightly to $65.6 million (25.9% of revenue) from $64.5 million (26.6% of revenue), but this masks the underlying pressure from rising costs, including tariffs and supply chain disruptions.

Management Guidance: A Cautionary Signal

Onto's Q3 2025 guidance underscores the challenges ahead. The company expects revenue of $210–225 million, a significant drop from Q2's $253.6 million, with operating margin projected to fall to 18–21%. This “low watermark” in Q3 is attributed to seasonal softness and near-term AI packaging delays, though management anticipates a rebound in Q4. The guidance highlights a critical question: Can Onto's revenue growth in the second half of 2025 offset the near-term margin pressures?

The company's acquisition of Semilab's materials analysis business for $545 million in 2024 adds a layer of complexity. While the deal is expected to add $130 million in annual revenue and be immediately accretive to EPS, integration risks and incremental costs could weigh on margins in the short term.

Industry Dynamics: AI as a Double-Edged Sword

The broader semiconductor equipment industry is navigating a pivotal inflection point. AI-driven demand for advanced packaging and heterogeneous integration is surging, with TSMC's CoWoS 2.5D packaging capacity projected to grow from 35,000 wafers/month in 2024 to 90,000 by 2026. This bodes well for Onto's core competencies in metrology and inspection.

Yet, the industry faces headwinds. Talent shortages, geopolitical tensions (e.g., U.S. export controls on EUV lithography), and supply chain fragility are creating bottlenecks. For Onto, the 1% tariff impact on gross margin and rising R&D costs (52% of EBIT in 2024) could further erode profitability unless offset by pricing power or operational efficiencies.

Earnings Estimate Revisions and Valuation: A Neutral Outlook

Analysts remain divided. The Zacks Consensus EPS estimate for 2025 stands at $5.13, a 3.93% decline from 2024, while revenue is expected to grow 0.64%. The stock's forward P/E of 19.68 aligns with the industry average, and its PEG ratio of 0.66 suggests it's trading at a discount relative to growth expectations. However, the Zacks Rank of #3 (Hold) reflects mixed revisions, with a 0.13% decline in EPS estimates over the past month.

Investors should monitor Onto's ability to maintain its 54–56% non-GAAP gross margin range in 2025, as this will be critical to justifying its valuation. The company's focus on high-margin metrology systems and AI packaging adoption could provide a tailwind, but execution risks—such as integration delays or margin compression—remain.

Is Onto a Turnaround Play or a Cautionary Case?

Onto's strategic moves—acquiring Semilab, expanding its PACE initiative, and capitalizing on AI packaging—position it to benefit from long-term industry trends. However, the near-term earnings pressure and mixed guidance suggest caution. The company's Q4 2025 outlook hinges on a timely acceleration in AI packaging demand, which is not guaranteed.

For investors, the key is to balance optimism with pragmatism. Onto's revenue growth and industry positioning make it a compelling play in a high-growth sector, but its profitability challenges and valuation neutrality mean it's not a slam-dunk buy. A disciplined approach—monitoring Q4 results, margin trends, and AI adoption rates—could help separate opportunity from risk.

Final Take

Onto Innovation is at a crossroads. Its top-line growth and strategic bets on AI packaging and advanced nodes are promising, but the path to profitability is clouded by margin pressures and industry-wide headwinds. While the company has the tools to thrive in a post-AI semiconductor landscape, investors must remain vigilant about near-term execution risks. For now, a “Hold” stance seems prudent, with a focus on Q4 momentum and the successful integration of Semilab. If Onto can navigate these challenges, it may yet emerge as a turnaround story—but patience and a watchful eye will be essential.