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Semiconductor Rally Back in Vogue
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Small Cap Pick: Onto Innovation Inc. (ONTO-US, $9.9B MCAP)
Semiconductors power everything.
They have become increasingly prevalent in a world that continues to drive towards digitalization.
While Nvidia dominates headlines, it is important to understand other components of the overall system that also benefit from recent secular themes.
This week's pick is a critical process control company: Onto Innovation Inc.
Why now?👉 Trade-Related Sell-off Not Justified for ONTO
Overview 👉 What Does Onto Do?
Where Do They Sit in the Supply Chain? 👉 Buyers/Suppliers
How Do They Make Money? 👉 Revenue Model
By The Numbers 👉 Key Metrics
Risks 👉 Potential Pitfalls
The recent semi rout was caused by rising trade tensions between the China and US from both potential parties heading into the US election.
Trade tensions between the US and China escalated under former US president Donald Trump, who now threatened 60% tariffs on Chinese goods if he wins. Additionally, the Biden administration this year increased tariffs on Chinese electric cars to 100%.
Trade wars look like they are set to escalate, and with China as a major customer for some parts of the ecosystem, the market got scared and initiated a sell-off.
During this sell-off, ONTO retreated nearly 25%. However, ONTO has only 9% of of revenue exposure to China vs. 49% for ASML, 43% for AMAT, and 42% for LRCX. The sell-off in the price action here looks unjustified.
Additionally, if we look at prior data over past mid-cycle corrections in semiconductors, ONTO had the best post-correction bounce out of the entire group, up 27% from the trough.
During the bounce-back you want to buy stocks that get oversold as well as those in the right secular growth area.
ONTO belongs to both camps.