ON Semiconductorof (NASDAQ: ON) A 24.5% decline last year has left the stock in long-term bullish territory as the market may have overreacted to weakness in its major end markets over the previous 18 months.
The semiconductor company manufactures smart power solutions and smart sensing technologies used in a variety of industries. However, its two main end markets are industrial and automotive.
In the automotive sector, its power solutions (especially silicon carbide chips for electric vehicles, or EVs:) helps automakers reduce vehicle weight and extend vehicle range.Furthermore, its intelligent sensing technologies aid the insights and senses used in advanced driver assistance systems (ADAS).
At the same time, its long-term case for industrial end markets is no less compelling digitization of factories and buildings, helping them become “smart” as they generate data to be analyzed in real-time iterative performance improvements.
There is no doubt that EVs and ADAS are the future of the automotive industry, and productivity improvements brought about by industrial automation and software (especially advanced AI analytics) will ensure that investments in smart connected factories and in buildings will grow in the future.
Image source: Getty Images.
The chart below shows the weakness of its final markets over the past 18 months. It has not been an easy environment. For example, the widely followed Institute for Supply Management’s Purchasing Managers’ Index (PMI) has been below 50 every month since November 2022. the lower figure indicates the contraction of the manufacturing economy), except for the month of March 2024.
Turning to the automotive markets, it’s no secret that relatively high interest rates make car loans more expensive and reduce car sales and production. What’s more, it’s worth noting that many automakers have pushed investments in EVs during the pandemic, and that’s partly responsible for the deluge of models on the market as high interest rates dampen demand.
A headwind from a slowing EV market first hit the company in the fall of 2023, when management was forced to cut its full-year estimate for silicon carbide in the automotive segment to $800 million in 2023, down from $1 billion previously.
There was similar disappointment in 2024, when CEO Hassan El-Khoury told investors: “We expect our silicon carbide revenue to grow in the low to mid-single digits through 2023,” on the earnings call in October.
Data source: ON Semiconductor. Chart by author.
Unfortunately, there’s nothing the company can do about its end markets, interest rates, or cost cycle decisions in the industrial and power world. El-Khoury’s comments in October gave no reason to expect. “The demand environment remains muted due to continued inventory depletion and slow completion demand. Our outlook for all markets remains unchanged as uncertainty remains between our customers.”
It’s good that El-Khoury is taking a cautious approach to guidance and commentary, as it prevents excessive optimism from seeping into the fund.
That said, ON Semiconductor doesn’t need a steep return to be an outstanding value stock. It’s currently trading at 15.7 times Wall Street estimates for 2024 earnings per share Wall Street expectations look modest, with revenue growth of just 4.2% and earnings per share (EPS) of $4.29, making 14.6 times estimated 2025 revenue.
Image source: Getty Images.
These are undemanding valuations for a company whose best days are ahead. The semiconductor market is notoriously cyclical, and the current lull is causing fear among industry investors. However, it’s more a question of when, not whether ON Semiconductor’s markets are cyclical to recover, and if 2024 proves to be a bearish year for its earnings, investors can expect substantial returns for the stock in 2025.
If it stays at this valuation, the stock is worth holding forever as the upside potential is significant.
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