ONTO Innovation Inc (NYSE:ONTO): A Strong Affordable Growth Pick in the Semiconductor Sector

Investors looking for growth opportunities at fair prices often consider the "Affordable Growth" strategy, which focuses on companies with strong growth potential and reasonable valuations. This method looks for stocks with a growth rating higher than 7, solid profitability and financial health, and a valuation score above 5, ensuring the company is not overpriced relative to its fundamentals. The aim is to find businesses capable of sustained earnings growth while trading at reasonable multiples, lowering the risk of losses. ONTO INNOVATION INC (NYSE:ONTO) meets these criteria, as shown by its fundamental analysis report.

Growth Strength

ONTO Innovation performs well with a Growth rating of 8, showing strong historical and expected expansion. Key metrics include:

• Revenue growth of 21.01% YoY, with a five-year average of 26.41%, well above many competitors in the semiconductor equipment industry.
• EPS growth of 24.12% over the past year, supported by a five-year annual growth rate of 36.96%.
• Forward estimates suggest continued progress, with expected EPS growth of 15.71% annually and revenue growth of 13.58%, pointing to steady demand for its metrology and inspection systems.

These numbers match the Affordable Growth strategy’s focus on finding companies with both proven and future growth potential, reducing dependence on uncertain forecasts.

Valuation Considerations

While growth is important, fair valuation ensures investors are not paying too much for future earnings. ONTO’s Valuation rating of 5 presents a balanced view:

• A P/E ratio of 19.06 is below the industry average of 41.52 and the S&P 500’s 26.84, suggesting it may be undervalued.
• Its forward P/E of 17.58 is lower than 72.73% of industry peers, reinforcing its affordability.
• The Price/Free Cash Flow ratio is better than 81.82% of competitors, showing efficient cash generation compared to its market price.

For Affordable Growth investors, these metrics indicate that ONTO’s growth potential is not fully reflected in its price, offering some protection against downside risk.

Profitability and Financial Health

The strategy favors companies with strong fundamentals to handle market fluctuations. ONTO does well in this area:

• Profitability rating of 8, driven by high margins: a 21.36% net margin (top 15% of peers) and 22.14% operating margin.
• Health rating of 9, reflecting no debt, a current ratio of 8.42 (top 7% of industry), and a strong Altman-Z score of 18.09, meaning very low bankruptcy risk.

These strengths highlight the company’s ability to reinvest in growth while staying financially stable, a key part of the Affordable Growth approach.

Conclusion

ONTO Innovation combines strong growth, fair valuation, and solid financials, making it an attractive option for investors seeking growth at a reasonable price. Its role in the semiconductor equipment sector, a critical part of advanced manufacturing, adds resilience during market cycles.

For more Affordable Growth stock ideas, check the full screener results here.

Disclaimer: This analysis is not investment advice. Do your own research or consult a financial advisor before making investment decisions.