Onto Innovation Inc. (ONTO Quick QuoteONTO - Free Report) described first-quarter 2026 as a better-than-expected start, fueled by strong AI-driven demand in advanced nodes and advanced packaging. The company also raised its 2026 outlook, projecting revenue growth of more than 30% and targeting an operating margin above 30% by the fourth quarter.

Both the top and bottom-line figures surpassed the respective Zacks Consensus Estimate as well as management’s expectations. Onto Innovation reported first-quarter revenues of $291.9 million, up 9.5% year over year and ahead of its expectations ($275–$285 million). Non-GAAP EPS came in at $1.42, also above forecasts ($1.26-$1.36). The semiconductor equipment company continues to benefit from strong AI-driven demand, advanced packaging adoption and next-generation chip manufacturing trends.

ONTO’s shares have soared 204.5% in the past year, outperforming the Zacks Nanotechnology industry’s growth of 198.9%. The company has also outpaced the Zacks Computer and Technology sector and the S&P 500 composite’s growth of 53.8% and 31.8%, respectively.

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ONTO’s key competitors include KLA Corporation (KLAC Quick QuoteKLAC - Free Report) , Camtek Ltd (CAMT Quick QuoteCAMT - Free Report) and Applied Materials (AMAT Quick QuoteAMAT - Free Report) . KLAC, CAMT and AMAT have grown 145.8%, 197% and 159.2%, respectively, in the same time frame.

But after the stock’s massive run over the past year, investors are asking an important question: Is ONTO still a buy, or has the rally already priced in the good news?

Let’s dig deep.

Why Investors are Bullish on ONTO

The major tailwind for Onto Innovation is the ongoing AI infrastructure boom. Advanced AI chips require more sophisticated packaging, higher precision inspection, advanced metrology tools and increased defect detection. Onto Innovation specializes in these areas. As companies like NVIDIA, Taiwan Semiconductor Manufacturing Company and memory manufacturers ramp AI production, Onto Innovation’s tools become increasingly essential. Management specifically referenced “insatiable” AI compute demand during earnings commentary. This positions ONTO as a secondary beneficiary of the AI boom without directly competing in chip design.

Rising demand for advanced semiconductor nodes, strong AI and high-bandwidth memory (HBM) investments, adoption of new inspection and metrology platforms and expansion in advanced packaging technologies augur well. Management highlighted strong traction for the Dragonfly G5 inspection system and Atlas G6 platform, both of which are gaining adoption among leading chipmakers. Advanced packaging technologies, such as 2.5D and 3D integration, are becoming essential for AI accelerators and high-performance computing chips. As chipmakers seek higher performance and better power efficiency, packaging complexity is increasing rapidly.

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The Dragonfly G5 platform addresses this trend by enabling more advanced defect inspection and process monitoring capabilities. Winning qualifications from both logic and HBM customers signals that Onto Innovation is strengthening its position in one of the fastest-growing semiconductor equipment segments. This is particularly important because HBM demand has surged alongside AI infrastructure growth. Companies producing GPUs and AI accelerators require increasingly sophisticated memory architectures, creating a major opportunity for semiconductor process control vendors like Onto Innovation.

Another major development was Onto Innovation’s collaboration with Rigaku Holdings Corporation. As part of the partnership, ONTO will purchase a 27% ownership stake in Rigaku for approximately $710 million. The transaction is expected to close in the second half of 2026. The partnership gives Onto Innovation access to a broader portfolio of advanced X-ray technologies, which could significantly enhance its semiconductor inspection and metrology capabilities. It expects three key benefits from the Rigaku deal — high-margin AI Diffract software licensing revenue, increased sales of metrology tools like Atlas G6 and annual dividend income of about $7 million — with these gains expected to offset lost interest income within a year of closing.

Combined with its earlier Semilab USA acquisition, Onto Innovation is clearly pursuing a strategy centered around expanding its process control ecosystem. These investments may help Onto Innovation address increasingly complex semiconductor manufacturing challenges while creating additional long-term revenue streams.

ONTO’s Profitability Mixed, Non-GAAP Margins Remain Strong

Despite record revenue, Onto Innovation’s GAAP profitability metrics declined year over year. GAAP gross margin fell to 50.1% from 53.7% in the prior-year quarter. Operating income also declined significantly, with GAAP operating margin dropping to 11.5% from 23.7%.

However, non-GAAP results painted a more stable picture. Non-GAAP gross margin improved slightly to 55.7%, while non-GAAP operating income rose to $77.9 million. The disparity between GAAP and non-GAAP figures likely reflects acquisition-related costs, stock compensation expenses and investments tied to future growth initiatives. Importantly, Onto Innovation maintained strong profitability relative to many peers in the semiconductor equipment industry. A non-GAAP operating margin above 26% demonstrates that the company continues to generate healthy operational leverage even while investing aggressively for expansion.

Onto Innovation ended the quarter with approximately $654 million in cash and short-term investments. The company also generated roughly $26 million in operating cash flow during the first quarter, providing additional financial flexibility. While the Rigaku investment represents a sizable capital commitment, Onto Innovation’s strong balance sheet positions it well to pursue strategic initiatives without placing excessive pressure on liquidity. The company’s financial strength could become increasingly valuable as semiconductor manufacturers accelerate spending on advanced packaging, AI infrastructure and next-generation fabrication technologies.

Despite the strong quarter, investors should understand the risks. Onto Innovation remains exposed to semiconductor industry cycles, including weaker electronics demand, inventory corrections, geopolitical risks and reduced chip-equipment spending. Onto Innovation competes against major semiconductor equipment players. Larger competitors have deeper resources and broader product portfolios. ONTO’s success depends on maintaining technological leadership in niche but critical areas of semiconductor inspection and metrology. Management highlighted rising cost pressures from higher material and fuel expenses, along with increased investments in R&D and service teams in the near term.

ONTO’s Stock is Expensive

ONTO has rallied significantly over the past year, and the valuation now reflects high expectations. In terms of forward price/earnings, ONTO’s shares are trading at 37.7X, higher than the industry’s 7.45X.

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KLAC, CAMT and AMAT are trading at multiples of 38.92X, 60.4X and 34.27X, respectively.

Upbeat Estimate Revision Trend for ONTO

Earnings estimates for ONTO have moved up for both 2026 and 2027 over the past 60 days.

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Should You Buy ONTO Stock?

ONTO appears to be a high-quality AI semiconductor infrastructure play with strong long-term growth potential. The company is executing well, benefiting from industry megatrends and showing improving operational leverage. Its latest results underscore how AI infrastructure spending, advanced packaging technologies and next-generation chip manufacturing are becoming major growth drivers across the semiconductor equipment industry.

While some profitability metrics softened on a GAAP basis, Onto Innovation’s strategic positioning in advanced nodes, HBM and GAA process control continues to strengthen. Investors also received a bullish second-quarter outlook that suggests demand remains healthy despite broader macroeconomic uncertainty. Onto Innovation suits investors seeking long-term AI-driven semiconductor infrastructure growth and willing to accept volatility, though valuation concerns and cyclical industry risks warrant caution.

Currently flaunting a Zacks Rank #1 (Strong Buy), ONTO seems to be a value addition for your portfolio.  You can see the complete list of today’s Zacks #1 Rank stocks here.