Onsemi (NASDAQ:ON) is a large semiconductor manufacturer that specializes in power chips, sensors, signal control chips and a variety of other semiconductors used in applications ranging from vehicle electrification to 5G infrastructure.
In the last year, ON shares have dipped by more than 30 percent, creating a potential entry point for investors, so is ON semiconductor stock a buy on the dip, or do the shares still look too risky at the moment?
Why ON Semiconductor Is Flagging
At its core, ON’s selloff is the result of weakening performance driven primarily by softness in the business’s end markets, particularly in automotive chips.
The Q2 earnings report provides a decent sense of just how significantly onsemi’s performance has been impacted by this trend. Revenue for the quarter came in at $1.47 billion, down from $1.74 billion in the year-ago quarter. Likewise, net income fell from $338.2 million in Q2 of last year to just $170.3 million in the same quarter this year.
Looking back over the trailing 12-month period, onsemi’s profitability has also been fairly low. Net margin for the period has been just 7.3 percent, while return on equity has come in even lower at 5.3 percent.
These low margins could put onsemi at higher risk in the event of a broader economic downturn than its high-margin semiconductor peers, as weaker sales could put disproportionate pressure on its bottom line.
Over the next several years, analysts do expect onsemi to average an EPS growth rate of about 8.4 percent. In the nearer term, however, the EPS growth rate is expected to remain negative, potentially setting ON shares up for further difficulties, especially if a general market downturn occurs before the business can begin to recover.
Has ON Actually Started Looking Cheap?
Although the stock is down considerably, shares of ON still don’t exactly look inexpensive. The stock is still priced at 45.1 times earnings and 3.2 times sales, both of which are considerably above sector averages.
Despite this, the current price of $48.26 is still roughly 19 percent below the analyst consensus price of $57.53.
ON currently has a consensus rating of hold, though it’s worth noting that 12 of the 30 analysts covering the stock have issued buy ratings.
Management’s Turnaround Plan
Although onsemi is somewhat at the mercy of larger macro trends, management has been proactive in attempting to improve the business’s footing.
To this end, onsemi announced earlier this year that it would be trimming about 2,400 jobs, equating to roughly 9 percent of its total headcount. Though short-term costs of up to $60 million will result from this restructuring, most of those costs are expected to appear in this year’s performance. Going forward, onsemi estimates savings of $105 million to $115 million each year as a result of slimming down its workforce.
While executing on this plan, management is also aggressively buying back shares in order to create more short-term value for shareholders. In the first six months of this year, share buybacks exceeded $600 million, up from only about $250 million in H1 of 2024.
This represented not only a massive stepping up of onsemi’s share buyback program but also more than the total free cash flow that the business has been able to generate so far this year.
Will the Macro Outlook for onsemi Improve?
Right now, onsemi is struggling with ongoing market weaknesses that are being exacerbated by the combination of inflation, tariff concerns and weak consumer sentiment. In the short term, these trends don’t appear likely to retreat. In fact, consumer sentiment recently experienced a fresh fall due to growing worries about the cooling job market.
With that said, such market trends tend to be cyclical, and onsemi will likely see improved conditions that are more conducive to growth eventually. Indeed, management’s Q2 commentary included early signs of stabilization, if not actual improvement, in the weak end markets that are hampering the business. In the meantime, onsemi’s approach of restructuring toward a leaner business model could help the business weather the tough times and position itself for stronger growth if and when the market improves.
Is ON a Buy on the Dip?
As a business, onsemi appears to be making most of the right moves considering its current situation. By aggressively cutting costs while positioning itself for improved growth once its end markets recover, onsemi appears to be setting itself up for long-term success.
In the interim, management’s decision to ramp up its buyback program both communicates a high degree of confidence about the future and gives onsemi the chance to create value for its shareholders during a difficult time.
It’s also important to acknowledge that onsemi’s chips give it exposure to a wide range of technological trends that are likely to carry on for quite some time. Automotive electrification, for instance, is likely to remain a growth market for the foreseeable future, as is the spread of 5G communication technology. Taking the long view, onsemi could be in a good position to both benefit from existing technology trends and take advantage of new ones as they arise.
Despite these positives, there are also some fairly large possible pitfalls that could be associated with ON. Specifically, the stock is still trading at a fairly large premium considering the single-digit EPS growth it’s expected to produce over the coming few years. In addition, there’s not yet a clear timeline for when the macro challenges onsemi is facing could reverse course, making it difficult for investors to predict a clear timeline for the stock’s potential recovery.
Taking all of this into account, ON currently looks like it may be a better stock to hold than to buy. Current shareholders may already have seen the worst of the selloff, and the combination of a likely eventual recovery with management’s continued efforts to create value through buybacks forms a decent thesis for holding. The stock, however, may not be quite cheap enough to entice investors to actively buy at current prices.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.