AMAT vs. ONTO: Which Inspection and Metrology Stock Has an Edge?

Applied Materials (AMAT) is positioned as a stronger investment than Onto Innovation (ONTO) due to its superior growth prospects in the AI-driven semiconductor market. AMAT's advanced inspection tools and expected doubling of AI chip revenues to over $5 billion in fiscal 2025 underpin its projected 6% revenue growth to $28.8 billion and 9.4% EPS growth to $9.46. Conversely, ONTO faces tool slot losses in AI packaging and revenue headwinds from US-China tensions, reflected in a weaker Zacks Rank of #5 (Strong Sell) compared to AMAT's #3 (Hold).

Analysis

Applied Materials (AMAT) and Onto Innovation (ONTO) are significant entities in the semiconductor inspection and metrology sector, crucial for chip manufacturing precision. AMAT demonstrates a stronger growth trajectory, heavily benefiting from the artificial intelligence boom. Its revenues from advanced semiconductor nodes reached $2.5 billion in fiscal 2024 and are projected to double in fiscal 2025, underpinning an expected 6% year-over-year total revenue growth to $28.8 billion and a 9.4% earnings per share (EPS) increase to $9.46 in fiscal 2025. AMAT's integration of AI-based image recognition in its SEMVision H20 systems and its specialization in advanced chip designs like Gate-All-Around transistors and High-Bandwidth Memory further solidify its market position. In contrast, Onto Innovation faces considerable headwinds. While its 3Di bump metrology solution sees demand from AI chip packaging, ONTO is losing tool slots in 2.5D AI packaging to competitors. Furthermore, with 10% of its fiscal 2024 revenues derived from China, escalating U.S.-China trade tensions pose a significant risk. Consequently, ONTO's fiscal 2025 revenue growth is forecasted at a mere 0.53% to $992.6 million, with an anticipated EPS decline of 3.75% to $5.14. Stock performance reflects these divergent outlooks: AMAT shares gained 5.8% in the past three months, while ONTO's shares plunged 29.4%. Valuation-wise, AMAT trades at a forward 12-month price-to-sales multiple of 4.36x, relatively cheaper than ONTO's 4.57x, both being below the sector average of 6.21x. This fundamental and market performance disparity is mirrored in their Zacks Ranks, with AMAT at #3 (Hold) and ONTO at #5 (Strong Sell).

Key Decisions for Investors

• Given Applied Materials' robust AI-driven growth prospects, strong financial forecasts for fiscal 2025, and comparatively favorable valuation, investors might consider holding or accumulating positions in AMAT.
• For Onto Innovation, investors should exercise caution due to its competitive challenges in AI packaging, significant China revenue exposure risks, anemic revenue growth projections, and anticipated EPS decline, potentially warranting a reduction in exposure or avoiding new positions.
• Monitor ongoing developments in the AI semiconductor market and U.S.-China trade relations, as these are critical factors influencing the outlook for both companies, particularly impacting ONTO's revenue stability and growth potential.