TipRanks Smart Growth Portfolio #67: Flaws of Fortune
Dear Investors,
In this edition of the Smart Growth Portfolio and Newsletter, we spotlight an AI growth story measured in nanometers. But first, some news and updates.
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Portfolio News
❖ Applied Digital (APLD) continues to secure long-term leases for its campuses. Just three weeks after the announcement of a major 15-year hyperscaler lease at Polaris Forge 3, the company closed another deal, this time for Delta Forge 2, a purpose-built AI Factory campus in a southern state, which will use the firm’s proprietary waterless cooling and high‑density infrastructure and is expected to start initial operations in the first quarter of 2028. APLD has now leased three sites totaling 810 MW in under 50 days.
The Delta Forge 2 deal is also a 15-year take-or-pay lease with renewal options. It covers 210 MW of critical IT load and is signed for $5.2 billion in base-term contracted revenue, or approximately $12.7 billion including all renewal options over a 30-year total term. The new agreement is Applied’s third long-term lease with the same U.S. based investment-grade hyperscaler.
With this deal, APLD’s contracted portfolio spans five AI Factory campuses, representing 1.4 GW of compute and roughly 2.15 GW of grid-connected utility power. The company’s total contracted base-term lease revenue has reached $36 billion, or $86 billion if all renewal options are exercised. Approximately 70% of contracted revenue is now backed by U.S. based investment-grade hyperscalers. Following the announcement, Needham, Craig-Hallum, and several other analysts raised their price targets on APLD.
At the same time, Applied Digital has priced a $1.59 billion private offering of 7.00% senior secured notes due 2031 at par. The net proceeds from the debt issue will be used to fund construction of a 150 MW data center building at Polaris Forge 1 in North Dakota.
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❖ Micron (MU) is expected to announce its fiscal Q3 2026 results on June 24. Wall Street expects the memory maker’s revenue to surge nearly 400% year-over-year to $34.7 billion, with adjusted EPS surging more than tenfold to $19.46. Analysts continue raising their price targets going into earnings, with Cantor Fitzgerald recently lifting its target to $1,500 and Wolfe Research to $1,250, underscoring broad bullish conviction on Micron’s AI memory dominance.
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This Week’s Top Growth Pick: Onto Innovation (ONTO)
Onto Innovation Inc. operates in the semiconductor industry’s precision-control layer, where advanced manufacturing, yield optimization, and next-generation packaging increasingly determine chip economics. Its systems help chipmakers read the production floor at microscopic scale – checking whether wafers, patterns, materials, and packages are forming exactly as intended before small deviations turn into lost yield. As AI chips, high-bandwidth memory, and advanced packaging make semiconductor production denser, costlier, and more technically demanding, Onto’s role becomes more strategic. The company sits near the point where manufacturing complexity turns into commercial execution, giving customers the visibility needed to move advanced designs from engineering ambition to reliable volume production.
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Nano Management
Onto Innovation was born in 2019 from the merger of Nanometrics and Rudolph Technologies, which combined two mid-sized players into a semiconductor process-control company with real scale. The new entity started life in an enviable position: a broad product portfolio spanning wafer manufacturing, front-end process control, advanced packaging, and factory analytics, a global customer base, more than $300 million in cash and securities – and zero debt. In short, enough heft to matter and enough financial flexibility to keep investing.
The timing proved fortunate. As AI, 5G, electric vehicles, and power semiconductors pushed chipmaking toward ever more complex manufacturing flows, process control and measurement shifted from supporting roles to mission-critical functions. Onto leaned into that shift, positioning itself as a broad process-control partner for chipmakers wrestling with yield, performance, and reliability challenges across multiple production steps.
Acquisitions did much of the heavy lifting. The 2021 purchase of Inspectrology deepened Onto’s overlay metrology expertise, particularly in specialty and compound semiconductors. In 2024, the company added Lumina Instruments, whose laser-scattering technology strengthened its inspection offering, and acquired Kulicke & Soffa’s lithography business, gaining intellectual property and engineering talent for its JetStep panel lithography roadmap. In 2025, it picked up key materials-analysis product lines from Semilab International, extending into wafer contamination monitoring, materials characterization, and surface-charge metrology. Together, these deals stretched Onto’s reach across advanced logic, memory, specialty devices, power semiconductors, and the advanced packaging that underpins AI hardware.
Just as importantly, Onto’s customer list reads like a map of the semiconductor supply chain: leading foundries such as TSMC, integrated device manufacturers and memory producers such as Samsung, and top assembly-and-test providers including ASE Technology, Amkor, and JCET. Serving customers at so many points in the chipmaking ecosystem gives the company an unusually wide view of where manufacturing complexity is building – and that visibility lets it spot emerging bottlenecks early, direct R&D toward the next high-value production problems, and entrench itself in the supply chain before new architectures scale.
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Flaw Enforcement
Onto is a picks-and-shovels supplier to the AI buildout, operating in the process-control layer of chipmaking. Its systems inspect defects, measure critical structures, analyze materials, support advanced-packaging lithography, and turn factory data into yield intelligence. The business rests on a simple dynamic: as manufacturing flows grow more complex, the cost of undetected problems rises – and process control is what keeps them detectable. Alignment, composition, interconnect quality, hidden defects: every new architecture adds places where yield can quietly slip away, and every one of them is a sales opportunity for Onto.
AI has accelerated that dynamic considerably. High-performance compute demands faster memory, denser packaging, tighter chiplet integration, and finer process control across both front-end wafer manufacturing and back-end assembly. Onto’s revenue mix shows just how directly it sits in that current: AI-related sales grew from 16% of the total in 2023 to 61% in 2025. Few equipment companies have repositioned toward the industry’s highest-growth segment that quickly.
The clearest near-term engine is advanced packaging – which management expects to grow more than 50% in 2026 – driven by high-bandwidth memory (HBM), 2.5D logic, smaller bump structures, 3D interconnect measurement, and early panel-level packaging adoption. Carrying that growth is Dragonfly, Onto’s inspection and metrology platform for advanced packaging, now ramping in its G5 generation. The upgrade is far from cosmetic: new optics, camera, staging, and algorithms allow it to detect features below 200 nanometers, compared with roughly 800 nanometers historically. That single leap opens inspection problems Onto previously couldn’t serve – and broadens the growth path into 2027. G5 has already been qualified by a leading 2.5D logic customer and a leading HBM manufacturer, with more than 15 applications across more than 10 customers waiting in the pipeline.
The HBM business adds visibility that is rare in the semiconductor equipment space. A volume purchase agreement worth more than $240 million with a leading HBM manufacturer covers Dragonfly 2D inspection and 3D bump metrology through 2027. The agreement does not eliminate timing risk, but demand is now anchored in one of AI hardware’s most binding constraints. And if the industry’s reported move toward customized HBM base dies progresses as predicted by analysts and industry specialists, the opportunity widens further as memory, logic, foundry, and packaging workflows become ever more intertwined.
Growth extends well beyond packaging. Atlas, Onto’s optical critical dimension metrology platform, measures the minute structures of advanced logic and memory; its latest G6 generation is gaining traction in gate-all-around logic and advanced DRAM, helped by a smaller-spot capability that lets customers measure inside the die itself rather than relying mainly on test structures. The Semilab product lines contribute wafer contamination monitoring, materials characterization, and surface-charge metrology – strengthening Onto’s hand in chiplets and power semiconductors, where charge buildup and epitaxial defects feed straight into yield loss.
Rigaku adds a longer-range strategic layer. Through a planned 27% minority stake and a collaboration around the Ai Diffract software, Onto is pairing the speed of optical metrology with X-ray’s ability to see deeper structures and richer materials detail. The nearer opportunity lies in software licensing alongside Rigaku’s X-ray systems. The larger one is hybrid optical/X-ray metrology for the logic and memory generations still on the drawing board.
The risks remain typical for semiconductor equipment: equipment demand can turn quickly, customer ramps can slip, and new platforms must prove themselves at production scale. What sets Onto apart is how many engines it has running at once – Dragonfly G5 in advanced packaging, Atlas G6 at advanced nodes, Semilab in materials control, Rigaku in X-ray-enhanced metrology, plus expanded factories closer to Asian customers. As chipmaking becomes harder to control, Onto has multiple ways to win.
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Proof of Yield
Onto’s financials are beginning to catch up with the business inflection. Coming off a record 2025 that ended on a softer note, Q1 2026 showed the ramp taking shape: revenue reached a quarterly record of $291.9 million, up 9.5% year-over-year and nearly 10% sequentially, above the company’s guidance range.
The quarter also clarified where the business is scaling. Onto remains primarily a systems-and-software company, with that category accounting for 85% of revenue, while parts and services made up the balance. The more useful growth lens is end-market exposure: specialty devices and advanced packaging represented roughly 55% of revenue, with advanced packaging accounting for about two-thirds of that bucket, while advanced nodes contributed approximately 27%, led by DRAM and logic demand.
That mix is important, as it aligns closely with the core drivers of the investment thesis: advanced packaging, HBM, advanced logic, DRAM, power semiconductors, and the materials-control capabilities added through Semilab. The Semilab product lines are already contributing financially, adding $27.1 million of Q1 revenue and $13.4 million of operating income after a much smaller contribution from the acquisition date through fiscal 2025 year-end. For a deal that cost $526.6 million, early execution matters, and Q1 made the integration look more like scale-building than drag.
Onto’s revenue base also reflects the geography of advanced chipmaking, keeping the company closely tied to the customers driving AI-related capacity expansion. Taiwan and South Korea were the two largest revenue regions in Q1, followed by the U.S., underscoring the company’s exposure to leading foundry, memory, and advanced-packaging ecosystems. China accounted for roughly 9.5% of Q1 revenue, making it a manageable exposure but still the one to watch as export controls continue shaping semiconductor equipment demand.
Profitability is less clean on a GAAP basis, but the underlying trend is constructive. GAAP gross margin fell to 50.1% from 53.7% a year earlier, and GAAP operating margin dropped to 11.5% from 23.7%, weighed down by acquisition-related costs, restructuring, inventory step-up amortization, and write-downs. Non-GAAP gross margin, however, improved to 55.7%, while non-GAAP operating margin reached 26.7%. Non-GAAP EPS was $1.42, slightly down year-over-year but up 13% sequentially, suggesting earnings are turning along with revenue.
Guidance points to continued acceleration. Management expects Q2 revenue of $320-330 million, implying roughly 20% year-over-year growth at the midpoint. Profitability is set to climb as well: non-GAAP gross margin of 56-56.5%, operating margin of 28-28.6%, and EPS of $1.65-1.73, up roughly 31% from a year ago.
The full-year framework is even more ambitious, and stronger than the prior quarter’s view – with the weight tilted toward the second half. Revenue is now expected to climb more than 30%, reaching above $1.3 billion, with H2 sales growing by at least 15% from H1 2026 and Q4 operating margin above 30%. Advanced packaging now expected to grow more than 50%, and advanced nodes about 25% – both ahead of the prior outlook.
Onto’s balance sheet gives the company room to fund this ramp. It ended Q1 with $654.2 million in cash and short-term investments, against $264.2 million of total liabilities and $2.13 billion of equity. Operating cash flow fell to $26.3 million from $92.0 million a year earlier, but the drop mainly reflected higher receivables and inventory as the business prepared for stronger shipments – more a working-capital build than a demand warning. The planned Rigaku stake is now backed by $1.3 billion of zero-coupon convertible notes due 2031, giving Onto long-term financing without near-term cash interest expense. Future dilution and fair-value swings through other income remain worth watching, but the structure preserves financial flexibility while the company invests in a larger opportunity set.
Customer concentration, China exposure, working-capital build, supply-chain lead times, and GAAP noise are real risks. Still, the stronger forces are moving in Onto’s favor: demand is accelerating, non-GAAP margins are improving, guidance is rising, and multiple growth engines are moving into production scale. Onto enters the next phase with revenue momentum, margin recovery, and a financing structure that supports continued investment through the ramp.
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Peer Review
Onto is best measured against a compact peer group of semiconductor yield-control enablers – companies tied to the same rise in manufacturing complexity, advanced packaging, and AI-driven memory demand. Nova is the closest direct comp, with overlapping exposure to optical, X-ray, and materials metrology used in advanced logic and memory manufacturing. Camtek captures the advanced-packaging inspection side of Onto’s story, especially around HBM, chiplets, and high-density interconnects. FormFactor is more adjacent than direct, but its probe-card and wafer-test business sits in the same “prove the chip works before scale” layer, with clear exposure to HBM and packaging-driven test complexity. Together, these peers frame Onto as a mid-cap process-control specialist benefiting from the same shift toward harder-to-manufacture AI chips.
Onto’s stock performance over the past year fits the pattern visible across the peer group: investors have been repricing the companies closest to AI-driven semiconductor complexity. Onto, Nova, Camtek, and FormFactor have all delivered triple-digit gains over the period, lifted by surging demand for HBM, advanced packaging, wafer-level inspection, and yield-critical test infrastructure. FormFactor has led the group, but Onto’s roughly 200% return ranks a strong second – ahead of both of its closest comps and firmly among the standout beneficiaries of the AI chip stack cycle. The path has not been smooth, with macro volatility, tariff and export-control concerns, and broad semiconductor pullbacks periodically hitting the group. Still, the message from the market is clear: investors are rewarding suppliers tied to harder-to-build chips.
That rerating has lifted valuations across the group, but Onto still looks reasonably positioned inside the peer set. The stock trades at about 9.5x forward EV/Sales and 30x forward EV/EBITDA – below Nova and Camtek on both measures, and only modestly above FormFactor on sales despite a more direct process-control profile. Its forward non-GAAP P/E falls from roughly 38x for FY1 to 28x for FY2 and 24x for FY3, showing how quickly the multiple compresses if the earnings ramp materializes. On FY1, Onto still trades below Nova, Camtek, and FormFactor; on FY2, the discount widens further. The broader valuation picture is mixed, as Onto’s trailing metrics still reflect the slower 2025 exit, while forward estimates capture the sharper 2026 ramp now showing up in guidance. However, Onto’s forward PEG ratio of about 1.1 is the strongest valuation point in its favor: it is cheaper than Nova and Camtek on growth-adjusted earnings despite sitting directly in the same AI-driven process-control cycle. That leaves Onto in an attractive position: the stock has already rerated sharply, but the valuation still leaves room for the earnings ramp to carry the next leg as Dragonfly, Atlas, Semilab, and Rigaku move from product traction into production scale.
Onto has run buyback programs since its early days, but treats them as an opportunistic tool – offsetting share-based compensation dilution and buying into weakness – rather than a core capital-return commitment, with M&A and R&D taking clear priority. The board authorized a $200 million repurchase program in 2024, and the company used roughly half of that capacity through Q1 2025, including buying into that spring’s tariff-driven selloff. Buybacks paused thereafter as the Semilab acquisition absorbed capital, and Q1 2026 repurchases were essentially zero – consistent with the working-capital build and the planned Rigaku investment. The $1.3 billion convertible offering in May 2026 reintroduced repurchases in structural form: approximately $205 million of the net proceeds went to concurrently buy back about 0.8 million shares, with another $77 million funding capped-call transactions designed to limit future dilution from the notes.
Measured against its peers – and measurement is, after all, the house specialty – Onto screens as the value pick in a premium group: the cheapest stock in the set per unit of expected growth, backed by a management team that invests for the long game and treats buybacks as a tactical tool rather than a way to chase short-term stock gains.
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To Sum It All Up
Onto offers a cleaner way to invest in AI chip complexity after the first wave of obvious winners has already rerated. The stock has surged, but the valuation still looks reasonable against peers when measured against expected earnings growth, while guidance points to accelerating revenue, expanding non-GAAP margins, and a stronger second half. The business is exposed to several bottlenecks that should keep growing as AI hardware becomes harder to manufacture: HBM, advanced packaging, gate-all-around logic, chiplets, materials control, and hybrid optical/X-ray metrology. Dragonfly, Atlas, Semilab, and Rigaku give Onto multiple paths to gain share as those bottlenecks move into production scale. With momentum already visible in results and the peer discount still present, Onto looks positioned for further upside if execution keeps matching the opportunity.
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Smart Growth Portfolio
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***Vistance Networks (VISN) apparent stock-price decline is not a real economic loss. Shares plunged nearly 50% on April 27 because they began trading ex-dividend after a $10 special cash distribution, meaning value was mechanically transferred from the stock price to shareholders as cash. Since then, VISN is up over 25%, reflecting strong investor confidence in the remaining business. Another similar value-transfer event is likely ahead: Vistance agreed to sell RUCKUS to Belden for $1.846 billion in cash, with most of the roughly $1.7 billion in net proceeds to be distributed to shareholders after closing. The deal is expected to be completed in the second half of 2026.
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