ONTO INNOVATION INC. (ONTO) stock intrinsic value fair value estimate & owner earnings analysis

Onto Innovation makes inspection, measurement, lithography and analysis equipment, plus software, that chipmakers use to check wafers and advanced chip packages during manufacturing. It reports one business segment and had 2025 sales of about $1.0 billion. In 2025, Taiwan was 32% of sales, South Korea 28%, the United States 12%, Japan 9%, China 7% and Southeast Asia 6%. One customer, identified in the filing as Taiwan Semiconductor Manufacturing (TSMC), was about 20% of 2025 sales. The company in its current form dates from the October 2019 merger of Rudolph Technologies and Nanometrics, so only the years since 2020 describe this business. What the owners actually earn. We measure the cash left for shareholders after the equipment spending needed to keep the business going and after the cost of stock handed to employees, and we strip out one-year swings in receivables, inventory and payables. Inventory write-downs are treated as a real recurring cost, not added back. On that basis owner cash earnings per share were about $1.99 in 2020, $3.84 in 2021, $4.94 in 2022, $2.87 in 2023, $4.17 in 2024 and $3.78 in 2025. The much higher cash flow reported for 2025 ($328 million) was helped by about $60 million of working-capital release, which this measure removes. Because the cash pile is valued separately below, we also remove the after-tax interest it earns ($35 million before tax in 2025), leaving business cash earnings per share of $3.83 (2021), $4.86 (2022), $2.54 (2023), $3.63 (2024) and $3.21 (2025). 2020 is left out of the normal level because it was the first year after the merger, with integration and inventory step-up charges still running. The five years 2021 to 2025 contain a boom, a downturn and a recovery, and their middle value, $3.63 per share (about $180 million a year), is the starting level for every case. Onto records about $39 million a year of amortization on acquired technology, which is added back because it is a sunk cost, and the first half of 2026 alone carried another $39 million after the Semilab purchase. Because acquired technology wears out, the cases credit no growth and let earning power decline after year 10. Recent results. In 2025 business cash earnings per share fell 11.6% from 2024 (owner cash earnings per share fell 9.4%). The base case starts at $3.63, which is 13.1% above 2025's $3.21. The reason is in the quarterly report filed August 6, 2026: second-quarter sales rose 35% to $343.1 million, operating income roughly doubled to $63.6 million from $32.2 million, and gross margin was 53.4% against 49.7% for all of 2025. First-half sales rose 22% to $635.1 million. The first quarter was weaker (operating income $33.5 million) and first-half net income of $93.9 million was slightly below last year's $98.0 million, so one strong quarter does not lift our starting level. Deals and financing. In November 2025 Onto paid about $436 million in cash (net of cash acquired) for Semilab USA; in its first seven weeks it added $8.6 million of sales and an operating loss of $6.2 million, so we credit it with no earnings. In April 2026, per the company's announcement, Onto signed an agreement to acquire 27% of Rigaku Holdings, an X-ray technology company, from a Carlyle affiliate for about $710 million, expected to close in the second half of 2026 and subject to regulatory approvals. Rigaku will not be consolidated and we credit it with no earnings; it is valued at its purchase price in the base and bull cases and at half that in the bear case, mirroring the 48% drop in Onto's own business cash earnings between 2022 and 2023. In May 2026 Onto issued $1.5 billion of zero-interest convertible notes due June 1, 2031 (convertible at about $381.80 per share, with a capped-call contract that offsets dilution up to $509.06) and spent $205 million repurchasing stock in the first half. At June 30, 2026 the company held $1.25 billion of cash and $0.63 billion of securities. We keep $150 million for operations, subtract the $710 million Rigaku payment, and subtract the notes at their present value of about $1.13 billion, because they pay no interest for almost five years. Even in the bear case, cash on hand after the Rigaku payment plus the cash the business generates over the next five years covers the $1.5 billion face amount. Base case: $56.40 per share. Business cash earnings stay at $3.63 per share for ten years, then decline 5% a year. The evidence is five years of results through a full cycle, an installed base whose customers typically keep purchasing later generations of the same vendor's tools, and research spending (first half of 2026: $74.0 million) funded from its own cash. No growth is credited. The business is worth $44.20 per share ($26.70 from the next ten years, $17.50 from the years after). The company holds $34.86 per share of cash after the operating reserve, pays $14.29 for Rigaku and receives a stake credited at the same $14.29, and owes the notes at $22.67 per share, leaving net cash of $12.20 per share. Bear case: $36.88 per share. This case has a downturn like 2008 to 2009, when industry equipment sales fell about 31% in 2008 and fell again sharply in 2009, to $15.9 billion (SEMI). Year 1 stays at $3.63. In year 2 sales fall 40% (about $400 million); each lost dollar removes about 50 cents of gross profit (gross margin was 49.7% in 2025), so after $45 million of cost cuts and 21% tax about $1.20 per share remains. Year 3 (sales down 25%, $40 million of cuts) is about $2.30, and year 4 (down 10%, $30 million of cuts) after the China loss below is about $2.75. China, already down from $136.9 million of sales in 2023 to $70.7 million in 2025 amid expanding US export controls, is lost entirely, worth about $0.56 per share a year, so recovery stops at $3.07 from year 5 through year 10, followed by an 8% a year decline. The business is worth $31.82 per share. The company holds $34.86 of cash per share after the operating reserve, pays $14.29 for Rigaku and receives a stake worth $7.15, and owes the notes at $22.67, leaving net cash of $5.05 and a total of $36.88 (rounded figures). Bull case: $77.18 per share. The business holds the $4.86 per share it actually earned in 2022 for ten years (2022 is the best year on record), followed by a 3% a year decline. The business is worth $64.98 per share; with net cash of $12.20 (cash $34.86, Rigaku stake at cost, notes owed $22.67, same as the base case) the total is $77.18. That value is below the $381.80 conversion price, so the notes are repaid in cash. What is left out. We credit no growth from the broader expansion of chip manufacturing or advanced packaging, share gains, margin improvement, a Semilab turnaround or Rigaku earnings. None is yet secured or part of a repeated pattern; sales have swung from $1,005 million in 2022 to $816 million in 2023 and back to about $1.0 billion since. Previous published figures (bear $51, base $109, bull $202) were built on different assumptions and are not comparable. What changed in the business is the second-quarter 2026 pickup, the $1.5 billion of zero-interest notes, the buyback, and the signed Rigaku purchase, which uses cash without adding earnings we can count. Margin-of-safety price: $27.00. We are fairly sure of the earnings level, because it rests on five years of reported results through a boom, a downturn and a recovery, but not sure the second quarter's strength lasts. The worst plausible outcome is a 2008-style collapse, the loss of China, or a cut by TSMC (about 20% of sales), and a failed Rigaku partnership is not modeled. The structure survives these: there is no interest-bearing debt and about $1.9 billion of cash and securities against $1.5 billion of notes. If we are wrong about three things the base case falls: with nothing earned after year 10 it is $38.90, with the Rigaku stake worth nothing $42.11, and with earnings at 2025's $3.21 it is $51.27. The company pays no dividend, so the price assumes a holding period of about five years while cash builds up inside the company. On the base case a share is worth about $69 in five years, so a 20% annual return requires a price near $27.74; the margin-of-safety price is $27.00 because earnings are cyclical, and in the bear case a share at $27.00 still reaches about $46 in five years (about 11% a year).