Summary
- The stock has done better recently, but the stock still remains in a holding pattern, with the stock having gone sideways for months.
- ONTO’s current FY2023 outlook may be too optimistic, especially in comparison to what other prominent names had to say.
- A lowering of the outlook may be coming, which could break the stalemate the stock finds itself in at the moment.
- There may come a time for long ONTO, but now does not appear to be that time with the way everything is laid out.
Onto Innovation ( ONTO ) has recouped the losses the stock suffered towards the end of 2022. The stock has jumped higher in 2023, raising hopes that 2023 could turn out to be better than 2022 did. However, the rally has lost steam in recent days. The stock appears to be going in circles, stuck between support and resistance. A catalyst could be needed to break the deadlock. Why will be covered next.
ONTO is in a holding pattern
ONTO shareholders did not have much to cheer about with the stock losing 32.7% of its value in 2022. However, 2023 is off to a good start with the stock having gained 14.7% YTD. However, the rally has slowed down in recent days. It looks like the stock is poised to keep moving sideways, which is something it has done a lot in recent months.
The chart below shows how the stock peaked in early 2022. The stock then went on a major slide in H1 2022, followed by sideways action in H2. There were rallies, followed by selloffs and vice versa, but the general direction appears to be sideways. It seems the stock is still in the process of consolidating and digesting all the gains from the rally, starting in March 2020 to January 2022, that saw the stock appreciate by 392% in about two years.
Note how the ups and down in the stock seem to be pivoting in the $72.50-75.00 region. There are numerous instances of the stock changing direction in or around this region. For instance, the stock did so as recently as January 19 when the stock dipped to hit an intraday low of $73.40, only to bounce and continue higher.
It's thus worth mentioning that using the stock's uptrend, starting from the March 2020 low at $21.53 and the January 2022 high at $105.96, the 38.2% Fibonacci retracement level is at $73.71. This is well within the aforementioned $72.50-75.00 price region. The 61.8% retracement level is at $53.78, which may be why the stock bottomed at $56.02 on October 13 for a 52-week low, followed by a quick bounce.
The stock then proceeded to rally in the next four weeks until it hit a high of $86.86 on November 11, which is close to the 23.6% retracement level at $86.03. The stock has since stayed between these two extremes as defined by the aforementioned Fibonacci retracement levels. The chart below shows the stock's recent moves, moves that seem to be influenced by Fibonacci levels.
Note the lower highs and the higher lows in the chart. The charts could be in the process of forming a symmetrical triangle, a holding pattern. The pattern is resolved when the trendlines formed by the higher lows and lower highs converge at the apex. This is still far away, suggesting the sideways action has ways to go before a change in direction is to be expected.
Possible catalyst to break the stalemate at ONTO
Nevertheless, the stock is getting close to the upper trendline, where it will likely meet resistance. If the stock is to break higher, it will have to overcome resistance. The stock has already been denied twice before, which suggests it may need some sort of catalyst to help out. This could come in the form of the next earnings report.
Consensus estimates expect non-GAAP EPS of $1.32 on revenue of $250.8M in Q4. This is roughly in line with the midpoint of ONTO's Q4 guidance as shown below. ONTO has beaten estimates in recent quarters, so ONTO could do it again.
Q4 FY2022 (guidance) | Q4 FY2021 | YoY | |
Revenue | $244-256M | $225.6M | 8.16-13.48% |
GAAP EPS | $0.97-1.12 | $0.94 | 3.19-19.15% |
Non-GAAP EPS | $1.25-1.40 | $1.23 | 1.63-13.82% |
Source: ONTO Form 8-K
Note that guidance implies a high probability the Q4 numbers will decline QoQ. If ONTO is to beat the odds and grow QoQ, it will probably have to surpass the top end of guidance. The table below shows the recent quarterly numbers for ONTO.
(GAAP) | Q3 FY2022 | Q2 FY2022 | Q3 FY2021 | QoQ | YoY |
Revenue | $254.253M | $256.310M | $200.589M | (0.80%) | 26.75% |
Gross margin | 55% | 52% | 55% | 300bps | - |
Operating income | $55.307M | $57.451M | $43.126M | (3.73%) | 28.25% |
Net income | $52.215M | $51.575M | $36.448M | 1.24% | 43.26% |
EPS | $1.05 | $1.03 | $0.73 | 1.94% | 43.84% |
(Non-GAAP) | |||||
Revenue | $254.253M | $256.310M | $200.589M | (0.80%) | 26.75% |
Gross margin | 55% | 52% | 55% | 300bps | - |
Operating income | $78.252M | $73.096M | $58.910M | 7.05% | 32.83% |
Net income | $67.495M | $64.001M | $48.733M | 5.46% | 38.50% |
EPS | $1.35 | $1.28 | $0.98 | 5.47% | 37.76% |
Notice how growth has gone flat in recent quarters as shown below. ONTO has greatly expanded in recent years with quarterly revenue increasing sequentially from Q4 FY2020 to Q2 FY2022, a string of 7 consecutive quarters. The streak came to an end in Q3 FY2022 when revenue shrank QoQ. Q4 guidance suggests it will happen again.
Consensus estimates for FY2022 call for non-GAAP EPS of $5.27 on revenue of $1B, but this is forecast to drop to non-GAAP EPS of $3.75-4.66 on revenue of $850-880M in FY2023. These numbers represent YoY declines of 11.6-28.8% and 12.0-15.0% respectively. Keep in mind that ONTO gave an early preview into FY2023, suggesting revenue would decline by 10-15%.
The FY2023 outlook from ONTO includes an $80M hit to revenue due to trade restrictions imposed by the U.S. government on China after a $10M hit in Q4. The wafer fab equipment or WFE market is seen to do worse, with a 20% contraction. However, ONTO also suggests the market will rebound with a stronger second half to the year after bottoming in the first half. From the Q3 earnings call:
"We expect many of these trends to drive growth next year in several of the segments we serve such as panel packaging, bare wafer and compound semiconductor manufacturing. We believe this will reduce the impact Onto Innovation of a projected 20% decline in global wafer fab equipment spending next year. At this level of global decline, we expect our revenue in 2023 to decline about 10% to 15%, including the negative impact of about $80 million from new restrictions on equipment sales to China.
Though still early we currently see the first half of 2023 will be the bottom followed by an incrementally stronger second half."
A transcript of the Q3 FY2022 earnings call can be found here .
Why ONTO could disappoint
Expectations for the next report are not high, based on estimates. ONTO has a good chance to beat expectations, especially given its recent track record. If ONTO comes up with a strong report, it may be enough to propel the stock past the current deadlock. On the other hand, the opposite could happen if ONTO disappoints.
It's therefore worth mentioning that recent signs are not encouraging. A number of other players in the WFE market have issued downbeat forecasts . This includes KLA Corp. ( KLAC ), which is one of ONTO's competitors and arguably the main one in metrology as the number one player. Lam Research ( LRCX ) is not a competitor, but it also had disappointing things to say about the WFE market, which could be relevant for ONTO as it suggests weakness in the WFE market could have much further to go.
This stands in contrast to ONTO's outlook, which currently suggests a relatively brief downturn with a bottom in H1. It's possible ONTO may have to revise its FY2023 outlook downwards at the next earnings call, given what other prominent WFE players had to say in recent days. This could propel the stock lower.
Caution is also warranted based on what the likes of Intel ( INTC ) had to say in their latest reports , which suggest semiconductor weakness is not close to bottoming. They suggest reduced capex spending in the near future, and thus less demand for WFE. These reports do not bode well for WFE suppliers, ONTO included.
Multiples for ONTO are neither a plus nor a minus
Lowering the outlook would not help current valuations for ONTO. Valuations for ONTO are not unreasonable like some other stocks, but they're also not at a level that would entice people that now is the time to get in. The table below shows some of the multiples ONTO trades at.
ONTO | |
Market cap | $3.87B |
Enterprise value | $3.34B |
Revenue ("ttm") | $977.6M |
EBITDA | $295.4M |
Trailing GAAP P/E | 19.10 |
Forward GAAP P/E | 18.22 |
PEG ratio | 0.25 |
P/S | 3.96 |
P/B | 2.46 |
EV/sales | 3.41 |
Trailing EV/EBITDA | 11.30 |
Forward EV/EBITDA | 10.81 |
Source: Seeking Alpha
For instance, the stock is valued at 2.46 times book value. In comparison, the 5-year average stands at 2.44 times book value. In other words, buyers can afford to wait as there is no need to rush. This could be especially true if the stock goes lower, which could happen once ONTO releases its Q4 earnings report and forecast next month.
Investor takeaways
ONTO's current outlook for FY2023 looks out of step with what other companies in the WFE space had to say in recent days. This includes a direct competitor like KLAC. It's possible ONTO is an outlier, but it's probably even more likely that ONTO will lower its previous outlook for FY2023, which is currently suggesting a relatively mild and short downturn.
I remain neutral on ONTO as stated before in a previous article . The stock has essentially gone sideways for many months now, which implies being long ONTO has probably not been rewarding. The stock is basically on hold, which could continue for a while, perhaps until the next earnings release.
While ONTO could surprise with a strong outlook, the odds are probably against it, given what is known about the state of the market based on what other market participants had to say. These comments suggest the present downturn in the WFE market could be more severe than what ONTO is currently predicting.
Bottom line, there's a real possibility that ONTO may have to revisit its relatively optimistic outlook for FY2023, which may have been overtaken by recent events and may thus be outdated. The chart patterns also suggest there's nothing to lose by waiting. Put all this together and standing on the sidelines looks best.
For further details see:
Onto Innovation Needs A Catalyst For Direction