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The artificial intelligence (AI) wave is taking the world by storm, revolutionizing everything from industries to daily life. As automation and intelligent technologies continue to surge, companies riding this trend are seeing explosive growth. And with investors keen to tap into the future of this game-changing technology, AI-powered companies are quickly taking center stage.
With AI demand soaring, Oppenheimer analyst Edward Yang sees huge potential in the “unglamorous” chip infrastructure companies powering the technological revolution. As compute demand doubles every six months, far outpacing hardware improvements, a critical shortage of advanced chips and the tools to make them has emerged. To meet this challenge, Yang advises investors to turn to wafer fabrication equipment makers, which are the backbone behind AI chip giants like Nvidia (NVDA) and Taiwan Semiconductor (TSM).
Keeping this in mind, Yang spotlighted two key players in the AI infrastructure space: Onto Innovation Inc. (ONTO) and Ultra Clean Holdings, Inc. (UCTT). As the "AI gold rush" continues, analyst Yang believes these two "pick-and-shovel" companies are primed to solve the semiconductor industry’s toughest hurdles, offering investors a golden opportunity to invest in the AI boom. Here’s a closer look at these two names.
Chip Stock #1: Onto Innovation
Massachusetts-based Onto Innovation Inc. (ONTO) stands out as a leader in process control, merging global reach with a cutting-edge portfolio of technologies essential for the semiconductor industry. The company’s offerings include unpatterned wafer quality assessments, 3D metrology for everything from nanometer-scale transistors to large die interconnects, overlay metrology, factory analytics, and advanced lithography solutions. This comprehensive suite empowers Onto to tackle the toughest challenges in yield, device performance, quality, and reliability for its customers.
Valued at around $10.1 billion by market cap, shares of this chip-manufacturing equipment company have rallied 61.8% over the past year, outshining the broader S&P 500 Index’s ($SPX) gain of nearly 34% during the same time frame. Plus, in 2024, the stock has posted strong gains of 36.4%, soaring beyond the SPX’s 19.7% return on a YTD basis.
Following the company’s stronger-than-expected Q2 earnings report, shares of Onto surged more than 8% on Aug. 9. The company recorded an impressive 27% year-over-year growth in revenue, reaching $242.3 million - which not only topped Wall Street’s forecast, but also surpassed the high end of management’s guidance, fueled by pilot line expansions in high-performance computing and high-bandwidth memory (HBM) supporting the AI market.
The company’s revenue from specialty and advanced packaging customers set another quarterly record of $164 million, thanks to robust demand from AI packaging clients. Plus, during the quarter, Onto secured over $300 million in volume purchase agreements from two major customers for their AI advanced packaging and gate-all-around investments, further cementing the company’s status as an industry leader.
On an adjusted basis, the company’s earnings of $1.32 per share demonstrated a remarkable 67.1% annual jump and blew past projections by a solid 11% margin.
“As we look forward, we expect continued strength in advanced packaging and the adoption of gate-all-around transistor architecture at several customers to lead our revenue growth in 2025,” commented CEO Michael Plisinski.
Looking forward to Q3, management forecasts revenue to range between $245 million and $255 million, while adjusted EPS is anticipated to land between $1.25 and $1.35. Over the longer term, analysts tracking Onto Innovation project the company’s profit to soar 38.9% year over year to $5.18 per share in fiscal 2024 and grow another 23.8% annually to $6.41 per share in fiscal 2025.
On Sept. 25, Onto closed up roughly 2.1% following Oppenheimer's bullish note, with an “Outperform” rating and a $260 price target. Analyst Edward Yang highlighted Onto as a “Key AI enabler” thanks to its yield enhancement tools for advanced packaging and high-bandwidth memory, driving impressive triple-digit growth through Nvidia’s major suppliers like Taiwan Semiconductor (TSM) and SK Hynix.
"We forecast over 20% annual sales growth for the next three years, with our 2025E-26E revenue 2% above consensus estimates," Yang noted. With its agility, strong value proposition, and dominance in often-overlooked back-end packaging, the analyst says Onto is well-positioned to attract customers seeking alternatives to single suppliers, paving the way for further market expansion.
ONTO stock has a consensus “Strong Buy” rating overall. Out of the seven analysts offering recommendations for the stock, six suggest a “Strong Buy,” and one has a “Moderate Buy” rating.
The average analyst price target of $259.29 indicates a 23.5% potential upside from the current price levels. However, the Street-high price target of $280 suggests that ONTO could rally as much as 33.5%.
Chip Stock #2: Ultra Clean Holdings
California-based Ultra Clean Holdings, Inc. (UCTT) is a key player in the semiconductor industry, specializing in the development and supply of critical subsystems, components, and ultra-high purity cleaning and analytical services. Through its Products division, Ultra Clean provides an integrated outsourced solution that enhances design-to-delivery cycle times and supports high-precision manufacturing, along with design for manufacturability and prototyping.
Meanwhile, its Services division focuses on cleaning and coating tool chamber parts, coupled with advanced micro-contamination analytical services. With its comprehensive offerings, Ultra Clean is positioned as an essential partner for companies seeking to optimize their semiconductor production processes.
Valued at a market cap of $1.71 billion, shares of Ultra Clean have kept pace with the broader SPX over the past year, delivering gains of roughly 33.6%.
After the company released its Q2 earnings results on July 25, which exceeded Wall Street's estimates, shares of Ultra Clean climbed more than 1% in the subsequent trading session. The company’s total revenue of $516.1 million soared 22.4% year over year, sailing past expectations by 5.3%, while its adjusted EPS of $0.32 doubled from $0.16 in the same period last year, and crushed Wall Street’s forecasts by an impressive 23.1%.
Reflecting on the Q2 performance, CEO Jim Scholhamer said, “UCT executed well in Q2 due to ongoing strength in demand from the domestic China market and customers supplying High Bandwidth Memory and equipment supporting advanced packaging for AI applications.”
The CEO further emphasized that Ultra Clean’s diverse portfolio and strategic footprint align with customers' technology roadmaps for 2024, positioning the company to accelerate growth as the market strengthens.
For Q3, management projects revenue to range between $490 million and $540 million, while adjusted EPS for the quarter is expected to arrive somewhere between $0.22 and $0.42.
Analysts tracking Ultra Clean Holdings expect the company’s profit to increase a stunning 223.5% year over year to $1.10 per share in fiscal 2024 and jump another notable 123.6% to $2.46 per share in fiscal 2025.
Shares of Ultra Clean shot up by a notable 11.5% on Sept. 25 after the company received its own “Outperform” rating with a $70 price target from Oppenheimer. Analyst Yang described Ultra Clean as a “unicorn” in the semiconductor ecosystem, noting that it is large enough to make a significant impact while remaining flexible and responsive to customer needs.
Yang emphasized the company's strong M&A potential, which sets it apart from larger oligopoly players, and mentioned that interest expense deleveraging could substantially enhance EPS following a rate cut. The analyst also highlighted that the company is "well positioned in AI growth areas, including nascent, but booming franchises in high-bandwidth memory, advanced packaging, and vacuum based EUV tools, all with leading Western OEMs."
Overall, Wall Street is highly optimistic, with a consensus “Strong Buy” rating for UCTT stock. Of the four analysts in coverage, three advise a “Strong Buy,” and one recommends a “Moderate Buy.”
The average analyst price target of $61.50 indicates a notable 55% potential upside from the current price levels. However, Oppenheimer's Street-high price target of $70 suggests that UCTT could rally as much as 76.5% over the next 12 months.
On the date of publication, Anushka Mukherji did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
