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Why Onto (ONTO) is an Enticing Investment Bet Post Q1 Earnings

Shares of Onto Innovation Inc. ONTO have surged 97.2% over the past year, driven by healthy revenues on the back of a flexible business model and solid market response for cost-effective solutions. The company reported strong first-quarter 2021 results, with both the top line and the bottom line beating the respective Zacks Consensus Estimate. Backed by robust order trends, the company registered record quarterly revenues and expects the momentum to continue in the second quarter on multiple secular growth drivers. With healthy fundamentals, this Zacks Rank #2 (Buy) consumer and electronic equipment manufacturer appears to be a solid investment option at the moment. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.  

Growth Drivers

Headquartered in Wilmington, MA, Onto operates as the leading manufacturer of avant-garde process control tools that perform macro defect inspections and metrology, and lithography systems. As a global leader of process and yield management solutions, the company plays a significant role in the design, manufacture and marketing of process control systems for 2D and 3D macro inspection, optical critical dimension metrology and wafer inspection. It boasts a broad portfolio of leading-edge technologies — metal interconnect composition, factory analytics and lithography for advanced semiconductor packaging — as well as develops innovative analytical software for certain industrial applications.

With state-of-the-art inspection, measurement and data analysis solutions, Onto reduces operating costs and accelerates product and process development. This enables customers to get a first-hand access to premium products at optimum prices. The company has an extensive geographical footprint and supports a diverse range of customers in more than 20 countries. It is one of the few companies that are an end-to-end supplier of products and applications, ranging from un-patterned wafer quality to advanced packaging lithography, with enterprise software solutions spanning across the entire value chain. The company believes that its evolving product portfolio and surging customer base are the cornerstones of its long-term growth across diverse markets.

Onto invests in research and development to provide differentiated products and services, which adds value to its manufacturing processes. Backed by its expertise in core technologies of optics and software, the rapid and ongoing development of new products and enhancements to existing products enable it to quickly respond to dynamic industry trends as well as competitive challenges. It caters to various markets such as Bare Wafer, Image Sensors, Flat Panel Display, Probe Test and RF/MEMS (radio-frequency/microelectromechanical system) among others.

The company has enhanced its product inspection and detection portfolio with the launch of Dragonfly G3 inspection platform. Designed to meet the most advanced 2D and 3D sensitivity requirements for advanced packaging and specialty device manufacturers, the product is likely to be a boon in identifying low contrast defects that hitherto went unnoticed. Notably, the Dragonfly G3 platform offers sub-micron sensitivity for complex packaging designs requiring redistribution lines to the tune of 1µm. Such high-tech product attributes have become more relevant with the growing specialty device market, which includes next-generation power devices, RF filters and amplifiers. These products require impeccable quality standards and process control equipment beyond the capabilities of legacy systems in order to detect smaller and new defect types. The Dragonfly G3 platform perfectly fits the bill with highly sensitive tools, providing repeatable and accurate data for high-precision product materials. The product has already garnered significant interest among customers and resulted in multiple orders from unnamed third-party packaging and test services provider and image sensor manufacturer.  

Increased adoption of optical metrology solutions and strength in high-performance computing and specialty devices, particularly in 5G smartphones, and baseband RF remain tailwinds for the company. With strong first-quarter results and healthy demand curve, the company has offered a bullish guidance for the second quarter of 2021.

Onto is housed within the Nanotechnology industry, which carries a Zacks Industry Rank #66, which places it among the top 26% of more than 250 Zacks industries. The stock’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates encouraging prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. Consequently, the stock appears to be an enticing investment option in the volatile market.

Other Key Picks

Some other top-ranked stocks in the broader industry are Viasat Inc. VSAT, Clearfield, Inc. CLFD and Nokia Corporation NOK, each carrying a Zacks Rank #2.

Viasat has a long-term earnings growth expectation of 24%. It delivered an earnings surprise of 190.9%, on average, in the trailing four quarters.

Clearfield delivered a trailing four-quarter earnings surprise of 79.8%, on average.

Nokia has a long-term earnings growth expectation of 1.5%. It delivered an earnings surprise of 215.2%, on average, in the trailing four quarters.

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