Today we have a speculative idea: take shares of the semiconductor business Onto Innovation (NYSE: ONTO), in order to make money on his growth.
Growth potential and validity: 14% behind 14 Months; 9% per annum during 15 years.
Why stocks can go up: because semiconductors are a hot industry.
How do we act: take now 86,51 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
The company still hasn't bothered to upload a detailed 2021 results report to its website., so we will have to use the 2020 report to analyze her business. There, where it will be possible, we will refer to her 2021 figures.
The company is engaged in the design and manufacture of equipment and software for the production of microelectronics, essentially semiconductors. The company's solutions are used both at the stage of chip production, as well as in the testing phase., assembly and packaging.
According to the company's 2020 annual report, revenue is divided as follows:
- Systems and software — 80%. The equipment itself and various programs for work.
- Spare parts - 12%.
- Services - 8%. Maintenance as equipment, as well as software.
Revenue by country and region:
- PRC - 22%.
- Taiwan - 22%.
- South Korea - 16%.
- USA - 15%.
- Japan - 15%.
- Europe - 9%.
- Southeast Asia - 5%.
Arguments in favor of the company
Fell down. The company's shares fell this year from 105.96 to 86,51 $. Means, we can pick them up waiting for the rebound.
Semiconductors. Chip makers around the world are stepping up investment in capital renewal, as the semiconductor business has suddenly become very marginal. So,, all these multi-billion dollar investments will lead to more orders for companies like Onto Innovation.
Clean accounting. The company is not burdened with heavy debts: She has just $511 million in her accounts, which is more than enough to cover all her debts., as long-term, as well as short term. In an era of higher interest rates and more expensive loans, this is a big plus.
Not very expensive. P / S company about 5,46 - below, than its major competitor KLA - 7,66. P / E from Onto Innovation is not the smallest - 30,29, but still not shamelessly brazen. Finally, Capitalization of Onto Innovation is very small - the company is worth $4.31 billion.
Considering all this, as well as the previously listed advantages of the company, I think, that KLA may well buy Onto Innovation, especially after her recent fall. Certainly, the buyer may be someone else. I just see KLA as the most likely buyer due to the presence of motivation for expansion.: the position of the largest company in the semiconductor equipment sector must be protected.
What can get in the way
Concentration. According to 2020 annual report, the company's two large customers account for a disproportionate percentage of its revenue: 15% — Samsung и 14% — Taiwan Semiconductor Manufacturing. A change in relationship with one of them can have an extremely negative impact on Onto Innovation's reporting..
COMPLAIN. Compared to the huge KLA, the small Onto does not look so cool: its gross margin is smaller and revenue growth is not as fast. On an annualized basis, Onto's gross margin is 55%, and in KLA - 60%. It is basically understandable.: due to its large size, KLA has the ability to dictate its prices to customers. This is problem, if KLA doesn't buy Onto Innovation, how I would like:
- Investors will prefer 'cooler' KLA and ignore Onto Innovation.
- Onto Innovation will be motivated to expand, to compete with KLA. And because of this, probably, get into debt, which could negatively affect its quotes.
The supply chain ate up my homework. The company has business all over the world: it is an exporter and a significant part of its production facilities and assets are located outside the United States. It means, that her business could suffer from logistical problems, faced by all businesses today..
However, the most recent company report on the situation as of 1 January 2022 says, that its performance compared to the same period a year earlier not only does not worsen, but even getting better.. Gross margin increased from 49 to 55%, and the operating room 9 to 22%. So that, may be, I overestimate the possible threat.
China. The company carries out a significant percentage of deliveries to China, and if the US continues to crush the Chinese tech sector, then this can have an extremely negative impact on the business of Onto Innovation.
What's the bottom line?
We take shares now by 86,51 $. And then there are two options:
- wait for the shares to return to 100 $. This is an acceptable premium to the current price of the company, and I think, that we will wait for this price during the next 14 Months;
- keep shares next 15 years. Over such a long distance, the probability of someone buying a company greatly increases.
