How Fast Is ON Semiconductor Growing?

ON Semiconductor Corporation (NASDAQ:ON) may not be as large as Intel and NVIDIA, but don’t be fooled – this company is one of the most powerful players in the semiconductor market.

Onsemi has developed and executed an effective strategy to command growth segments such as automotive, industrial, and IoT, which put it in the right place at the right time to enjoy substantial rewards. 

For example, the rise of electric vehicles, coupled with the increasing integration of Advanced Driver-Assistance Systems (ADAS), has been particularly valuable for Onsemi. After all, electric vehicles and ADAS can’t operate effectively without strong power management and sensing solutions, and that’s where Onsemi shines.

Onsemi’s diversified portfolio of products positions the company as a key partner for businesses in multiple industries. Its revenue isn’t dependent on a single area of the market, which reduces risk during periods of volatility. 

Overall, Onsemi’s financials appear healthy, as demonstrated by strong revenue and margins. Its acquisitions have contributed to strengthening the company’s capabilities and increasing its market share, allowing the firm to take advantage of the steady trend toward a more connected, automated, and electrified world.

How Is Onsemi Restructuring Its Business?

ON Semiconductor has experienced significant change in recent years, as leadership has reorganized and streamlined the business structure to increase focus on high-growth segments and integration. Examples include divestiture of non-core business lines and acquisition of assets specialized in the automotive, industrial, and IoT sectors.

The company’s leadership referred to the project as the “Fab Right” initiative, and the objective was to increase productivity and reduce expenses.

Onsemi carefully reviewed each manufacturing location, closed non-essential sites and restructured the remaining facilities to increase efficiency and introduce new cost savings.

As a result of this work, ON Semiconductor was able to decrease its workforce by about 1,900 employees, which is expected to have long-term financial benefits. In the short-term, Onsemi incurred $59.1 million in severance and related costs, with $41.9 million paid and $17.2 million accrued as of December 31, 2023.

Last year, Onsemi increased its capacity in Hudson, New Hampshire, Roznov, the Czech Republic, and Bucheon, South Korea, to raise silicon carbide (SiC) materials production and meet the increased demand for SiC solutions in the current market.

The company continues to review operations in order to drive profitable growth and seize opportunities in attractive end-markets of automotive and industrial infrastructure. 

Acquisitions Are Part of Onsemi’s Growth Plan

One of the most prominent acquisitions was completed in 2021 when Onsemi acquired GT Advanced Technologies to boost capacity in SiC materials manufacturing. SiC is widely used in the production of electric vehicles and other high-growth industries.

This acquisition is in line with Onsemi’s longer-term plan to expand its power solutions business, which targets the automotive and industrial markets where energy efficiency and performance are critical.

In 2022, Onsemi divested four wafer manufacturing plants in Oudenaarde, Belgium; South Portland, Maine; Pocatello, Idaho; and Niigata, Japan. However, the company did not put its wafer supply at risk. The deals included wafer supply arrangements with the respective buyers to ensure Onsemi’s ability to meet customer demand. 

On December 31, 2022, Onsemi acquired the manufacturing facility of EFK and some other assets and liabilities from GLOBALFOUNDRIES U.S. Inc. for $406.3 million. This increased Onsemi’s capacity through expanded production facilities and broader expertise. The deal also included a supply agreement that guaranteed ON Semiconductor an adequate stock of wafers in line with its plans for growth.

How Is Onsemi’s Financial Performance?

The semiconductor firm delivered strong financial results in 2023, posting Q4 revenue of $2.02 billion and full-year automotive revenue of $4.3 billion. This represented a 29% increase year-over-year.

Gross margin for the quarter came in at 46.7% on both GAAP and non-GAAP basis. The operating margin was 31.6% on a non-GAAP basis, highlighting Onsemi’s profitability.

Throughout the year, Onsemi gave back to shareholders via a share repurchase of $564 million, which was 140% of the free cash flow. The company’s non-GAAP EPS for the fourth quarter was $1.25. 

A key focus to drive growth involved improvements in the automotive segment and a four-time year-over-year increase in silicon carbide revenue. It seems the competitive advantage Onsemi enjoys in the semiconductor industry is expected to continue in the foreseeable future.  

So far, 2024 financials validate that Onsemi’s progress is sustainable. The company reported stable results for the first quarter of the year 2024. Non-GAAP EPS came in at $1.08, which exceeded predictions by 3%.

Onsemi recorded revenues of $1.86 billion for the quarter, which was slightly more than the expected $1.85 billion. Shareholders were pleased to learn that Onsemi maintained its profitability, highlighting strong operational efficiency and solid positioning in key markets. 

Is Onsemi a Buy?

Though Onsemi stock has been volatile in recent weeks, it has increased by more than 300% over the past five years. More importantly, Onsemi’s 18.55 times non-GAAP forward earnings metric is lower than that of its industry competitors, suggesting this is the right time to buy Onsemi stock.

Tactically, Onsemi is well-positioned to profit from high-growth markets. The dual focus on innovation and sustainability in power solutions and sensing technology is aligned with current and foreseeable market trends. 

Further, organizational changes aimed at the centralization of production functions and improved operational efficiency are expected to increase profits. This is in addition to the positive market sentiment that enhances Onsemi’s attractiveness as an investment. Approximately 50% of analysts who have reviewed Onsemi stock rate it a buy, and the target price represents a 10% gain for those who buy Onsemi stock now.

So, How Fast Is On Semiconductor Growing?

ON Semiconductor revenue growth has averaged 7.0% annually over the past 5 years and is forecast to grow at a 5.0% CAGR over the next half decade. Net income is projected to climb at a pace of 7.6% annually over the next five years.

Those two numbers should support a valuation argument that pegs fair value at $83 per share according to a discounted cash flow forecast analysis.

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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.