It’s no secret as to why Nvidia (NASDAQ: NVDA) is soaring this year — its GPUs are proving to be the secret sauce powering today’s incredible artificial intelligence applications.
But there will be other companies that benefit from skyrocketing AI chip demand in the future. The following stock is involved in semiconductor inspection — a market that should see accelerating growth in the years ahead, thanks to AI.
Onto Innovation (NYSE: ONTO) is smaller than other better-known semiconductor equipment giants, but its products and end markets straddle two sweet spots for AI.
Formed in 2019 by the merger of Nanometrics and Rudolph Technologies, Onto Innovation specializes in process control systems, which scan semiconductor processors and systems for defects. This is important technology, as process control enables higher chip yields, which helps customers increase their profits. And the more advanced a chip is, the more process control is needed.
Artificial intelligence is increasing complexity within chips and in the interconnections between chips, and that complexity is set to increase exponentially in the years ahead.
Within leading-edge chips needed for AI, semiconductor foundries are now transitioning to a new transistor structure called gate-all-around (GAA), which should be in production next year. This is the next leap over the current FinFET structure, in which a transistor is surrounded on three sides by the controlling gate.
In GAA, the transistor will now be surrounded on all four sides and stacked vertically. This is much more complicated, and Onto believes it will lead to a 50% increase in its market opportunity on leading-edge nodes.
Onto’s Atlas systems have been winning orders for leading-edge applications in GAA, with some analysts even saying it’s taking some share from metrology giant KLA Corporation.
Even more than chipmaking, the advanced packaging market is set to soar by an even greater percentage for a number of reasons, thanks to AI applications.
First, to process vast amounts of data quickly, AI systems require high-powered GPUs to be assembled close to high-bandwidth memory stacks. In addition, these systems usually include CPUs and an interposer, forming a complete system-on-chip. These AI SoCs require new packaging innovations and much more complexity, which should drive up the intensity for Onto’s packaging systems.
Beyond that, CPUs and GPUs will also require packaging within processors themselves going forward.
You may have heard that chipmakers, such as Intel and Advanced Micro Devices, are now producing processors consisting of “chiplets,” or optimized portions of a chip manufactured separately and stitched together. This technique allows for greater price performance, and keeps up with Moore’s Law as single dies run up against the laws of physics and photomask constraints.
While Nvidia still produces GPUs on a single die, it seems likely that even Nvidia will eventually transition to chiplet packages at some point.
Chiplet structures could see massive growth in the future. Between 2022 and 2030, Onto projects total chiplet packages will increase 18-fold, leading to a fourfold expansion of Onto’s advanced packaging market.
That growth potential is already showing up. Back in August, Onto issued a press release saying it had received over $100 million in orders of its Dragonfly System for advanced packaging, to be delivered over the course of the fourth quarter and first quarter of 2024, with orders increasing after that.
That’s a big deal for a single product and market, as Onto’s revenue is projected to be just $820 million in total in 2023.
At first glance, Onto looks expensive, at 34 times earnings. However, that valuation is deceptive for two reasons.
First, outside of AI, the larger PC and smartphone markets are currently in bad cyclical downturns. In fact, even though Onto’s AI offerings are seeing rapid adoption, its overall revenue was down in the June quarter by 25% from the prior year.
However, those mature markets are likely bottoming now and should improve next year, with growth likely supercharged by AI tailwinds.
Onto also has just over $609 million of cash on its balance sheet. That’s more than 10% of its market cap, which means the stock is about 10% “cheaper” when factoring in that excess cash.
Suffice it to say that while Onto may not be a screaming bargain, investors may be surprised at how much the company will grow over the next several years. It’s a name growth investors should either buy or put on the watchlist.
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Billy Duberstein has positions in KLA and Onto Innovation. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel and long January 2025 $45 calls on Intel. The Motley Fool has a disclosure policy.
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