Market Commentary: 1 Tiny AI Stock Seals $100M Deal

Just when we thought Onto Innovation had shared all its good news for the quarter, the semiconductor equipment manufacturer dropped another bombshell. Onto has raked in new equipment orders to the tune of more than $100 million.

What’s the catalyst behind this financial windfall?

You guessed it—artificial intelligence (AI). And it’s not just any AI, but the work they’re doing in tandem with industry behemoth, Nvidia.

Key Points

• Onto Innovation has secured new equipment orders exceeding $100 million, largely driven by its involvement in artificial intelligence (AI), particularly through collaboration with Nvidia.
• Previously cautious about the near-term semiconductor market, Onto’s latest orders boost its Dragonfly G3 sales projection through the second half of 2024, signaling the arrival of an AI-fueled financial boom.
• Amidst these developments, the company aims to double its annual sales to $2 billion by 2028, supported by strong growth in the AI market.

What’s Cooking at Onto?

In their recent earnings discussion, Onto had already painted a rosy picture about heightened interest in their Dragonfly G3 inspection and metrology systems. These pieces of equipment are instrumental in quality assurance during the intricate process of packaging advanced chips into complete computing systems.

Onto didn’t keep us guessing about who’s knocking on their door for Dragonfly G3 systems. The company confirmed that the orders came from industry-leading logic and memory manufacturers.

These big players are keen on building heterogeneous integrated (HI) packages, a sophisticated blend of a graphics processor (GPU) and high bandwidth memory (HBM) devices, all wrapped up into a single, highly efficient AI GPU.

Why the Nvidia Connection Matters

These freshly minted Dragonfly G3 systems will predominantly serve Nvidia’s AI computing endeavors, with AMD’s new MI300 graphics processing unit also possibly in the mix. Importantly, neither Nvidia nor AMD are in the business of manufacturing these chips themselves. Enter third-party chip foundries.

The real heavy-lifting is done by Taiwan Semiconductor Manufacturing when it comes to churning out GPU wafers and chips. For HBM memory, the spotlight is on SK Hynix and, increasingly, Samsung. These manufacturers are all legacy customers of Onto Innovation and appear to be ramping up their orders to meet the burgeoning demand for advanced AI technologies.

Decoding the $100 Million Financial Impact

Onto had been somewhat cautious about the semiconductor industry’s near-term prospects, with many of its clients in a transitional phase. However, the company sensed a revival in the atmosphere. During the earnings call, the management had projected about $90 million in Dragonfly G3 sales from Q3 2023 through Q1 2024.

The completion of this new set of orders has upped the ante. The order book for Dragonfly G3 systems now exceeds $100 million and extends into the latter half of 2024. The AI wave isn’t just on the horizon for Onto; it’s already crashing on the shore.

When you look at Onto’s overall sales forecast for 2023 under $1 billion, a $100 million deal is a significant chunk of change. Moreover, Dragonfly G3 isn’t just a one-hit-wonder; it’s a cornerstone in Onto’s strategy.

The company has set its sights on doubling its 2022 sales peak of $1 billion to reach $2 billion in annual sales by 2028. And the thrust of generative AI market demands will be a major player in achieving this target. Profit margins? Those are expected to climb too.

ONTO Investment Outlook Is Red Hot

Following the latest AI-driven developments, the market is waking up to the growth tailwinds pushing Onto. The company’s shares are now trading at 37.9x earnings. While there could be other semiconductor stocks with more immediate upside, Onto Innovation is fast becoming a company you can’t afford to ignore.

Long story short, Onto Innovation has landed in the limelight, and its prospects have never seemed brighter. If you’re eyeing long-term semiconductor investments with a flavor of AI, Onto could be a dish best served hot.