Onto Innovation: A Much Anticipated Setback Arrived

seekingalpha11-03 17:18

Onto Innovation has seen sequential revenue growth this year, but the performance still lags compared to 2022.Shares have tripled in the meantime, driven by AI-excitement, but have come down since the...

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The semiconductor process control company delivers on better yields, performance, quality and reliability for its clients. In fact, it has done so for shareholders as well, but momentum was a bit too steep in recent years. The risk-reward proposition deteriorated quickly, mostly as shares have seen huge momentum higher in 2023 and 2024, while the reported numbers were quite stagnant. Over the past months, shares are down over a quarter, while sequential growth is delivered upon and bolt-on deals are being announced. This gradually improves appeal, which is not to be confused with an appealing situation seen here. Process Control For Semiconductors Onto Innovation claims to hold a special and important role within the semiconductor value chain. The company's solutions boost yields, performance, quality and reliability for clients, all designed to make the critical path of progress in the semi space faster and more efficient. In the so-called process control supplier market, the company claims to be the third largest US player, behind industry giants like KLA Corporation (KLAC) and Applied Materials (AMAT). Onto Innovation employs some 1,500 workers, which among others maintain 10,000 metrology inspection tools. Pre-pandemic, the company already made huge inroads as a $1 share in the financial crisis of 2009 rose to the $40 mark pre-pandemic, all while a $200 million business a decade ago has grown to a billion revenue base in 2022. This growth looks more spectacular than it is, as the company has incurred about 50% dilution over this time frame, mostly the result of a merger between its predecessors Rudolph and Nanometrics which took place in 2019. The Performance Coming out of the pandemic, Onto posted a spectacular 27% increase in annual sales to $1.01 billion, with GAAP operating income reported at $236 million, translating into handsome margins in the lower twenties. Amidst net interest income received on a substantial cash balance, and amidst a low tax rate, the company posted GAAP earnings of $223 million, equal to $4.49 per share, as adjusted earnings came in nearly a dollar higher. Given this dynamic, an $80 valuation early in 2023 looked quite reasonable, but things were about to change, with first quarter sales for 2023 seen at just $200 million, being a serious decline. Through the summer of 2023 the company announced its first AI related Dragonfly G3 inspection system orders, reported at $100 million. Such order news was needed as the operating performance in 2023 was quite dreadful with revenues for the year down 19% to $816 million, as GAAP operating earnings were essentially cut in half to $116 million. Adjusted earnings were posted at $3.73, down substantially from $5.52 per share in 2022. While the company touted a strong order intake, the company guided for first quarter sales for 2024 at $215-$230 million, with adjusted earnings seen between $1.00 and $1.20 per share. The company reported its results on the higher end of the guidance, while calling for second quarter sales between $230 and $240 million, suggesting modest sequential improvements. To illustrate the momentum in the share price, these results were trailing those reported in 2022 when shares traded around the $80 mark, while they rose to a high around $240 per share this summer. With shares having tripled in just about 18 months, while the actual reported results were down from 2022, it was clear that expectations have risen quite a bit on the hopes for AI-demand and orders boosting near term reported results. All this made that the risk-reward has only deteriorated greatly in my view, as rosy prospects were more than reflected in the share price. Coming Down Since my cautious take in July, shares have fallen by about a quarter, down from $240 per share to $175 per share at the moment of writing. In August, the company posted resilient second quarter results, with second quarter sales reported at $242 million, surpassing the higher end of the guidance, as adjusted earnings were reported at $1.32 per share. The company guided for third quarter sales to advance modestly to a midpoint of $250 million. On the final day of October, the company posted third quarter sales at $252 million, in line with the guidance, as adjusted earnings were reported at $1.34 per share. The company guided for third quarter sales to improve sequentially to a midpoint of $260 million, with adjusted earnings seen roughly around the $1.40 per share mark. Net cash holdings have risen to $855 million amidst retained earnings and conservative capital allocation practices. Cash holders are equal to more than $17 per share, based on a share tally just shy of 50 million shares. Trading down to $175 per share, the company commands an $8.7 billion equity valuation and $7.9 billion enterprise valuation. This comes as sales currently trend just over a billion here, and adjusted earnings come in just over $5 per share. That earnings number is a bit overstated, as it includes interest income to the tune of about half a dollar per share. With operating assets valued at around $160 per share, and realistic earnings running at $4.50-$5.00 per share, shares are still trading at a demanding 32-35 times earnings multiple. This is down a lot from the peak of around 50 times earnings this summer, but up from a market multiple in 2022, as the commentary suggests continues sequential improvements into 2025. A Bolt-On Deal Alongside the third quarter results, Onto announced the acquisition of Lumina Instruments, a deal set to improve its detect sensitivity capabilities below 100nm, complementing its Firefly inspection system for panel packaging applications. The company furthermore acquired patents and teams from Kulicke and Soffa Industries (KLIC), with these deals combined expected to add some $100 million in annual sales in three years' time, expected to bring non-quantified accretion to earnings as well. Unfortunately, no financial details on the deals were announced. For 2025, further growth is seen, but this has not been quantified. On the conference call, management suggested that growth is seen, yet it downplayed the expectation of a 20% sales growth rate. If the company delivers on near 20% growth, sales could advance to $1.2 billion next year, but likely realistic earnings are stuck around $6 per share. This makes that expectations are still quite elevated, and even after a 25% pullback over the past months, we have to remember that shares started the year in the $130s.  Given all this, I am performing a balancing act, and still leaning cautious here. I like the long-term set-up, the bolt-on deals paid for from a rich cash position, and anticipate sequential revenue improvements. This is very much welcomed, but the hurdle and expectations are simply still too high for me to become upbeat at current levels.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2480359487"}