onsemi Standing Out On Execution And Auto Leverage, But Macro Looms As A Headwind

I was quite bullish on onsemi (NASDAQ:ON) back in March due to the company’s strong margin leverage achievements and its exposure to fast-growing semiconductor opportunities like advanced power (silicon carbide (or SiC), specifically). Although the modest decline in the share price since then is a little disappointing, the nearly 30% outperformance to the SOX index does support the general notion that this is a meaningfully better-than-average semiconductor story.

Since early this year I’ve been beating the drum that the semiconductor market was going to see a slowdown, and the market has since moved to accept that as a consensus view. While onsemi does have some negative exposure to industrial end-markets (particularly with legacy products) as well as non-auto/non-industrial markets that are likely to be weaker in 2023, I believe onsemi will fare better than most. Moreover, I see ongoing revenue and margin growth opportunities that make this a standout in its space.

Valuation is still a positive, though onsemi’s better relative performance mitigates some of its appeal on a relative basis, and I do still see a risk that sentiment for the entire semiconductor space could worsen from here. All told, I think this is a stock you can buy here and be happy about it in the years to come, but there is a risk of rockier performance over the next year or two.

 

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onsemi Standing Out On Execution And Auto Leverage, But Macro Looms As A Headwind

onsemi Riding High, But The Ride Doesn't Have To End Soon

onsemi (NASDAQ:ON) (formerly "ON Semiconductor") is rising quickly up my list of go-to examples when I say that successful turnarounds can go much further than the market initially thinks. CEO Hassane El-Khoury has quickly established credibility for the company's margin-improvement efforts, including exiting less-efficient fabs and walking away from low-margin business, and it lends more credibility to a long-term growth story built on rapidly-growing demand for advanced power and sensing/imaging chips across a range of auto, industrial, and compute markets.

I've liked onsemi for a while, and I still do even after a 40% run since my last update. Along with Infineon (OTCQX:IFNNY) and STMicro (STM), I expect onsemi to ride strong demand in power and sensing to high single-digit long-term revenue growth, while company-specific drivers lead to substantially higher margins and free cash flow generation. With updated expectations, I think these shares have near-term upside well into the $70's, though I do see more short-term cyclical risk here.

 

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onsemi Riding High, But The Ride Doesn't Have To End Soon