Initiating coverage of Onto Innovation with a Buy rating, favoring AI advanced packaging-driven inspection and metrology demand

Overview

Goldman Sachs initiates coverage of ONTO with a Buy rating. The report's core view is that AI accelerators and HBM are driving advanced packaging toward 2.5D, 3D, and hybrid bonding, increasing the number of high-value chips in packages and the cost of yield loss, thereby raising process-control intensity for defect inspection and metrology. With Dragonfly G5, Atlas G6, and its laser and infrared inspection capabilities, ONTO is positioned to grow faster than the overall wafer-fab equipment market in advanced packaging and advanced nodes, while improving profitability through manufacturing efficiency and product-mix enhancement.

Core views

Advanced packaging is the key demand driver: AI-related CoWoS and HBM capacity expansion will increase demand for wafer-level packaging inspection. Products and customer validation are critical to share recovery: Dragonfly G5 has received qualification approval from TSMC's new-tool selection committee for 2.5D advanced packaging and secured a $240 million volume purchase agreement through 2027 from a leading HBM manufacturer. The report expects the product to help ONTO recover from share losses during prior TSMC CoWoS-L ramp-ups. On profitability, Asian manufacturing deployment, a higher mix of next-generation high-ASP tools, and operating leverage are expected to jointly drive margin expansion.

Analysis framework

The report applies a top-down analysis of AI advanced packaging, HBM, and process-control market demand, combined with product performance, customer qualification, competitive dynamics, and segment revenue forecasts, to develop revenue, margin, and earnings-per-share projections for 2025 through 2028; the target price is derived by applying a target P/E multiple to normalized EPS.

Methodology notes

• Valuation methodsP/E Valuation

  The target price is based on 32x normalized earnings per share

  The report applies 32x P/E to normalized EPS of $12.50 to derive a 12-month target price of $400. The valuation multiple is at the higher end of ONTO's historical range, reflecting growth momentum related to advanced packaging and high-performance computing.

• Industry and Competitive AnalysisMarket Share and Product Competitiveness Analysis

  Competitive positioning is assessed through product performance, customer validation, and market-share changes

  The report compares the shares and technology characteristics of ONTO, KLA, and Camtek in wafer-level packaging inspection, and evaluates share-recovery potential based on Dragonfly G5's sensitivity, throughput, and TSMC qualification.

• Earnings ForecastingSegment Growth and Operating Leverage Analysis

  Revenue mix, manufacturing efficiency, and product mix drive margins

  The analysis forecasts revenue from advanced nodes, advanced packaging, and software and services, while incorporating Asian manufacturing migration, a higher mix of next-generation tools, and selling and administrative expense leverage into its margin assessment.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• ONTO.US

  Directly Covered Security

  Strengths

  The company has exposure to wafer-level packaging inspection, thin-film metrology, and back-end applications; Dragonfly G5 offers 150 nm sensitivity and up to 5x the throughput of G3; laser and infrared capabilities support buried-defect inspection in hybrid bonding; product validation with TSMC and a leading HBM manufacturer supports share recovery.

  Weaknesses

  The company experienced significant share losses from late 2024 to early 2025 as TSMC CoWoS-L volume-production demand increased, indicating that product performance and customer-introduction execution remain key constraints.

  Comparison

  KLA dominates high-resolution front-end optical inspection and held approximately 48% of the wafer-level packaging inspection market in 2025; Camtek held approximately 24%; and ONTO held approximately 27%. The report believes ONTO has throughput and total-cost-of-ownership advantages in high-volume back-end manufacturing and expects its share to rise to 42% by 2028.

  Risks

  A slowdown in AI capital expenditures, competitors launching equipment with comparable throughput and cost advantages, advanced-packaging capacity shifting more toward OSATs or Chinese domestic manufacturers, or customer qualification and volume-purchase timing falling short of expectations.

Key data

• Rating and Target PriceBuy; $400.00Initiating coverage, 12-month target price.
• Report-Listed Share Price and Upside$331.71; 20.6%Key data on the report's cover page.
• 2025–2028 Revenue CAGRApproximately 35%Goldman Sachs forecast.
• Advanced Packaging Revenue CAGRApproximately 56%2025–2028 forecast.
• Wafer-Level Packaging Inspection Market CAGR31%Expected growth through 2028.
• Wafer-Level Packaging Inspection Share27% in 2025→42% in 2028Goldman Sachs forecast for ONTO's share.
• 2026/2027/2028 Operating Margin30.7%/35.4%/35.3%Goldman Sachs forecast.
• 2025/2026/2027 Operating EPS$8.25/$12.50/$15.00Forecast basis disclosed in the report.
• Dragonfly G5 Customer ProgressTSMC qualification approval and a $240 million volume purchase agreementThe agreement is from a leading HBM manufacturer and extends through 2027.

Impact & implications

If AI capital expenditures and CoWoS and HBM capacity expansion progress as expected, process-control spending could account for a larger share of wafer-fab equipment investment. For ONTO, growth in advanced-packaging inspection demand, Dragonfly G5 adoption, and hybrid-bonding inspection capabilities represent upside drivers for revenue and market share; meanwhile, product-mix upgrades and Asian manufacturing migration could improve gross and operating margins. Valuation realization depends on share recovery, customer purchasing cadence, and the sustainability of AI infrastructure investment.

Risks

• AI-related capital expenditures or advanced-packaging capacity expansion may slow, suppressing demand for ONTO in advanced packaging and front-end inspection.
• Customer adoption, qualification, or progress on incremental volume purchase agreements for Dragonfly G5 may fall below expectations, delaying share recovery.
• KLA, Camtek, or other competitors may launch products with comparable performance, throughput, and total cost of ownership, limiting share gains and pressuring revenue.
• If advanced-packaging capacity expansion primarily shifts toward OSATs or Chinese domestic manufacturers, the competitive landscape could become more favorable for Camtek.
• Asian manufacturing migration, product-mix upgrades, or operating-expense leverage may not materialize as expected, resulting in margin expansion below forecasts.

What to watch

• Qualification, order, and volume-production adoption progress for Dragonfly G5 at TSMC and other advanced-packaging customers.
• Execution of the leading HBM manufacturer's $240 million volume purchase agreement and whether new volume purchase agreements emerge.
• Whether CoWoS-, HBM-, and hybrid-bonding-related capacity expansion maintains high growth.
• Changes in ONTO's wafer-level packaging inspection market share relative to KLA and Camtek.
• Revenue-mix changes across advanced packaging, advanced nodes, and software and services, as well as the pace of gross-margin progress toward the 60% target.
• AI capital expenditures, wafer-fab equipment investment, and changes in customer inventories and purchasing cycles.