Onto Innovation Inc: Chip Tech Stock to Benefit from 5G Acceleration

Onto stockOnto Innovation Inc Semiconductor Technology Could Be Huge in 5G

The race for 5G supremacy is well underway, especially given the restrictions on China’s 5G technology sector. The shift in U.S. policy will open the floodgate to increased development and innovation.

Key components of 5G hardware that are in demand are advanced semiconductors. As a play on this, a small-cap with a terrific risk/reward is Onto Innovation Inc. (NYSE:ONTO), a provider of advanced solutions used in the development of advanced semiconductors.

This maker of wafer fabrication equipment is steadily growing revenues while turning profits and generating free cash flow.

But despite the decent fundamentals and growth prospects, ONTO stock has vastly underperformed the Nasdaq, down seven percent this year.

Onto Innovation Inc staged a strong rally from the March low of $20.32, but it remains well below its pre-COVID-19 high of $42.50.

The chart shows Onto Innovation stock emerging from a parabolic recovery to above both its 50-day and 200-day moving averages.

Chart courtesy of StockCharts.com

The buying in ONTO stock was supported by bullish relative strength and a moving average convergence/divergence (MACD) buy.  Watch for a move towards $40.00.

Strong Growth and Attractive Valuation Positive for ONTO Stock

Revenues for Onto Innovation increased in each of the last four years to a record $305.9 million in 2019. The compound annual growth rate (CAGR) was 13.1% during this timeframe.

Fiscal Year Revenue (Millions) Growth
2015 $187.4 N/A
2016 $221.1 18.00%
2017 $258.6 17.00%
2018 $273.8 5.90%
2019 $305.9 11.70%

(Source: “Onto Innovation Inc.,” MarketWatch, last accessed October 9, 2020.)

There may be some concern towards Onto Innovation stock given that the revenue growth rates in 2018 and 2019 were below the CAGR.

But there are reasons to feel optimistic. Onto Innovation Inc is estimated to ramp up revenues by a whopping 78.8% to $547.0 million this year before moderating back to 13.4% to $620.0 million in 2021. (Source: “Onto Innovation Inc. (ONTO),” Yahoo! Finance, last accessed October 9, 2020.)

The revenue bump in 2020 is due to the merger of Nanometrics Incorporated and Rudolph Technologies, Inc. in October 2019.

Onto Innovation is also profitable and producing positive earnings before interest, taxes, depreciation, and amortization (EBITDA).

EBITDA increased at double digits from 2016 to 2018 prior to a flat 2019 following the merger. Expect a big jump in the EBITDA this year.

Fiscal Year EBITDA (Millions) Growth
2015 $15.4 N/A
2016 $37.4 142.40%
2017 $49.7 33,0%
2018 $57.5 15.60%
2019 $57.9 0.80%

(Source: MarketWatch, op. cit.)

ONTO has been profitable on both a generally accepted accounting principles (GAAP) basis and an adjusted basis.

Fiscal Year GAAP Diluted EPS Growth
2015 $0.12 N/A
2016 $1.75 1358.30%
2017 $1.17 -33.10%
2018 $1.74 48.90%
2019 $0.06 -96.40%

(Source: MarketWatch, op. cit.)

On an adjusted basis, Onto Innovation profits are much higher. The company earned an adjusted $1.39 per diluted share in 2019. Estimates call for Onto Innovation to make $1.64 per diluted share this year and follow with $2.37 per diluted share in 2021. (Source: Yahoo! Finance, op. cit.)

Onto Innovation Inc also managed to generate free cash flow (FCF) from 2016 to 2019.

Fiscal Year FCF (Millions) Growth
2015 -$0.3 N/A
2016 $41.7 15258.60%
2017 $13.4 -67.90%
2018 $27.6 105.60%
2019 $11.3 -58.80%

(Source: MarketWatch, op. cit.)

Meanwhile, ONTO has strong working capital. minimal debt of $22.75 million, and ample cash of $312.1 million, or $6.39 per share. (Source: Yahoo! Finance, op. cit.)

Analyst Take

The expected growth in 5G technologies will help Onto Innovation stock. The merger was a good choice.

The fact that revenues are growing and Onto Innovation Inc is profitable is bullish. I like the upside potential given that ONTO stock is trading at a cheap 13.29 times its consensus 2021 earnings per share (EPS) and 1.18 times book value.

You rarely witness small technology growth stocks trading at these attractive multiples, so it makes sense to take a look.