Just a couple of weeks after providing a promising financial outlook at its latest quarterly update, small semiconductor equipment maker Onto Innovation (ONTO) said it has just finalized new equipment orders worth over $100 million thanks to new developments in … you guessed it, artificial intelligence (AI).

The usual suspect, Nvidia, is the likely reason for this recent add-on order, but it helps illustrate the big trends moving small, under-the-radar Onto Innovation. Here’s what investors need to know about this small AI company.

Onto’s AI payday
During its last earnings update, Onto said it has been experiencing a boost in interest in its Dragonfly G3 inspection and metrology system, equipment crucial to quality control during the packaging of advanced chips into computing systems. As for its recent Dragonfly G3 orders and where they’re from, Onto said in a prepared statement:

The orders are from leading logic and memory manufacturers for heterogeneous integrated (HI) packages that combine a graphics processor (GPU) and numerous high bandwidth memory (HBM) devices to create an AI GPU in a single package.

Ultimately, these Dragonfly G3 machines will primarily be used in packaging AI compute systems from Nvidia, and perhaps to a lesser extent AMD and its new MI300 graphics processing unit (GPU) that will try to keep pace with Nvidia’s offerings.

However, neither Nvidia nor AMD handle manufacturing themselves. That’s left to their third-party chip foundries. And when it comes to the high-end GPUs mentioned in Onto’s statement, that means Taiwan Semiconductor Manufacturing, which handles the making of GPU wafers and chips, as well as some final compute system packaging. And for HBM memory, that means memory chip leaders SK Hynix and now presumably Samsung too as Nvidia looks for other companies to help it scale up supply of its AI systems.

These three companies, Taiwan Semi, SK Hynix, and Samsung, which are longtime customers of Onto, are likely boosting their purchases of its equipment to help address the sudden booming demand for generative AI.

For Onto, $100 million is hefty change
Now, back to Onto’s most recent earnings report. The company is in the middle of a downturn this year as many of its customers have been retooling for the semiconductor industry’s next run higher. That’s expected to begin having a bigger impact on financials starting in 2024.

Nevertheless, Onto had said things were beginning to heat up again. In the earnings call, management said its Dragonfly G3 system was expected to haul in $90 million in sales “over the next three quarters” — from the third quarter of 2023 (the current quarter that will conclude at the end of September) through the first quarter of 2024 (ending March 2024).

But with the finalization of this latest order, the total purchase amount through Q1 2024 is now over $100 million “plus new orders now extending into the second half of 2024.” In other words, the AI boom is coming for Onto Innovation.

One-hundred million-plus isn’t chump change for this company, as it’s on track to only haul in about $800 million to $850 million in sales in 2023. However, the Dragonfly G3 system will be an integral piece of the growth story over the next five years. Earlier this summer, Onto said at its investor update it sees a path to reaching as much as $2 billion in annual sales by 2028, which is double its $1 billion sales peak reached in 2022. New demand from the generative AI market would play a large part in this success. The company expects hefty profit-margin increases along the way too.

Of course, those are just goals. Actual stock returns will depend on Onto’s ability to execute on its plans in the next five-year stretch.

After this latest AI revelation, the market seems to have caught wind of the current growth trends blowing at Onto’s back. Shares now trade for 40 times trailing-12-month earnings, and 30 times Wall Street analysts’ expectations for 2024 earnings. There could be more timely semiconductor-stock buys right now. However, at the very least, keep an eye on Onto Innovation as big things could be brewing for this small growth company.

— Nicholas Rossolillo

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Source: The Motley Fool