ONTO Pre-Q2 Earnings: Buy the Stock Amid AI-Led Demand & HBM Momentum?

The consensus mark for revenues is pegged at $325.6 million, indicating a 28.4% rise from the year-earlier quarter’s actuals.

ONTO’s earnings beat the Zacks Consensus Estimate in two of the trailing four quarters, while missing in the other two, with the average surprise being 1.4%.

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ONTO’s Earnings Whispers

Our proven model does not predict an earnings beat for Onto Innovation this time around. The combination of a positive Earnings ESP  and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. That is not the case here.

Earnings ESP: ONTO has an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: ONTO currently boasts a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Key Trends Shaping ONTO’s Q2 Results

AI-driven demand continues to strengthen, boosting both front-end and advanced packaging. This helped first-quarter revenue exceed guidance and is expected to drive roughly 20% year-over-year revenue growth in the second quarter. Onto Innovation expects second-quarter revenues of $320–$330 million, implying about 10% upside to prior estimates at the midpoint and 28% year-over-year growth. Second-half momentum is likely driven by customer expansions, new product adoption and a growing backlog, supporting more than 15% sequential revenue growth.

Beyond robust revenue, Onto Innovation expects continued improvement in gross and operating margins in the second quarter, despite headwinds from higher material and fuel costs, along with increased R&D and service investments. The company expects gross margin between 56% and 56.5%, and non-GAAP operating margin between 28% and 28.6%. While monitoring macro and company-specific cost pressures, Onto Innovation remains confident it can expand gross margins by at least 50 basis points in the third and fourth quarters each and exit the year with an operating margin above 30%.

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In April, Onto Innovation deepened its partnership with Rigaku by acquiring a 27% stake for approximately $710 million. The deal is expected to close in the second half of 2026 and will be primarily funded with cash on hand. This deal expands Onto's advanced X-ray technology portfolio, strengthening its semiconductor inspection and metrology capabilities. Along with the Semilab USA acquisition, it broadens Onto Innovation's process control ecosystem. While Rigaku's financials won't be consolidated, the deal is expected to boost earnings through high-margin AI Diffract software, higher metrology tool sales and annual dividend income, with benefits offsetting lost interest income within a year of closing.

Onto Innovation's fastest-growing opportunities lie in advanced packaging and High-Bandwidth Memory (HBM). HBM manufacturing requires precise wafer inspection, defect detection, metrology and packaging inspection. Each of these represents a potential revenue source for the company. In April, ONTO successfully qualified its new Dragonfly G5 platform for both new and existing 2.5D advanced packaging applications, with shipments starting in June. The system features proprietary optics, enhanced illumination and advanced algorithms, improving visibility and throughput while reducing overall ownership costs.

Onto Innovation sees strong growth potential for Dragonfly G5, supported by more than 15 applications across more than 10 customers. Rising AI demand and packaging capacity limits are also speeding up the adoption of panel-level packaging, while JetStep has been qualified at two AI packaging suppliers with production ramp-ups expected in 2027, supporting advanced packaging revenue growth in the second quarter. Furthermore, its advanced nodes business continues to strengthen across logic and memory, driven by Atlas G6 adoption, growing DRAM demand and a new TSV metrology win. With improving NAND trends, ONTO expects advanced nodes revenue to grow about 25% in 2026, outpacing overall wafer fab equipment market growth.

Onto Innovation has historically generated healthy free cash flow, allowing it to invest in innovation while maintaining financial flexibility. For the second quarter, we expect operating cash and free cash flow to be $97.4 million and $90.3 million, respectively.

Despite favorable industry trends, Onto Innovation faces risks from the cyclical nature of semiconductor demand, potential delays in customer capital spending, export restrictions affecting China, intensifying competition in process control, a slower-than-expected recovery in automotive and industrial chips, and ongoing supply chain disruptions. China remains an important semiconductor market but also introduces uncertainty because of ongoing export restrictions affecting advanced semiconductor technologies. Any signs that export regulations are materially affecting sales could pressure revenues.

ONTO Stock vs. Industry

ONTO’s shares have soared 183.3% in the past year, outperforming the Zacks Nanotechnology industry’s growth of 181%. The company has also outpaced the Zacks Computer and Technology sector and the S&P 500 composite’s growth of 30.2% and 23.8%, respectively.

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ONTO’s key competitors include KLA Corporation KLAC, Camtek Ltd CAMT and Applied Materials AMAT. KLAC, CAMT and AMAT have grown 106.8%, 58.2% and 189.2%, respectively, in the same time frame.

ONTO’s Valuation

In terms of forward price/earnings, ONTO’s shares are trading at 30.41X, higher than the industry’s 5.91X.

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KLAC, CAMT and AMAT are trading at multiples of 33.06X, 38.02X and 33.99X, respectively.

Investment Outlook: Buy ONTO Before Q2 Earnings?

Onto Innovation heads into second-quarter earnings with several favorable tailwinds. The company's exposure to AI infrastructure, advanced packaging, chiplet architectures and HBM manufacturing places it in some of the semiconductor industry's fastest-growing segments. While cyclical uncertainties and geopolitical risks persist, the company's differentiated technology portfolio, solid profitability and exposure to long-term secular growth drivers make the stock a smart buy for investors now. If ONTO delivers healthy results alongside constructive guidance, it could further strengthen the investment case for the company as a key enabler of the next generation of semiconductor innovation.

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This article originally published on Zacks Investment Research (zacks.com).

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