Harnessing High-Growth Segments And Silicon Carbide Innovation For Future Success

Key Takeaways

• Strategic focus on high-growth segments like automotive and AI data centers positions ON Semiconductor for strong future revenue and margin growth.
  
• Advancements in silicon carbide technology and manufacturing optimizations enhance production efficiency, potentially boosting net margins and earnings.
  
• Weakness in automotive and industrial markets, coupled with macroeconomic uncertainties, may pressure ON Semiconductor's future revenues and profitability.

Catalysts

Provides intelligent sensing and power solutions in the United States and internationally.

• ON Semiconductor is positioned in high-growth segments like automotive, industrial, and AI data centers, which are expected to outpace the overall semiconductor market growth. This could significantly drive future revenue increases.
  
• The company's investment and design wins in silicon carbide technology, particularly in China's expanding BEV market, positions it for increased market share, benefiting future revenues and net margins due to high-value product offerings.
  
• ON Semiconductor's advances in silicon carbide technology, including transitioning to 8-inch wafers and vertical integration, are expected to optimize production efficiency and costs, which can enhance future net margins and earnings.
  
• Continued focus on reducing capital intensity and optimizing manufacturing (e.g., through the Fab Right strategy) imply improved future gross margins and higher free cash flow, enhancing earnings per share.
  
• The expansion of its power and sensing product portfolio into markets like AI data centers, where power delivery content is expected to increase significantly by 2028, promises new revenue streams and solid growth in earnings.

ON Semiconductor Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ON Semiconductor's revenue will grow by 7.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.8% today to 28.7% in 3 years time.
• Analysts expect earnings to reach $2.7 billion (and earnings per share of $6.44) by about November 2027, up from $1.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $3.1 billion in earnings, and the most bearish expecting $1.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.0x on those 2027 earnings, up from 16.6x today. This future PE is lower than the current PE for the US Semiconductor industry at 30.3x.
• Analysts expect the number of shares outstanding to decline by 1.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.44%, as per the Simply Wall St company report.

ON Semiconductor Future Earnings Per Share Growth

Risks

• Continued softness in the automotive market, with slowing EV sell-through and muted end demand, could impact future revenues.
  
• Inventory digestion and slow end demand in industrial markets could hinder revenue growth and fail to provide meaningful market growth in 2024.
  
• Regional softness in North America and Europe, particularly in automotive and industrial segments, may limit revenue opportunities.
  
• Caution around building inventory and below-forecast sell-through outside China could affect future revenue and profitability.
  
• Uncertainty in macroeconomic conditions, coupled with flat to slightly down utilization rates, may pressure revenues and gross margins.

Valuation

• The analysts have a consensus price target of $86.04 for ON Semiconductor based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $107.0, and the most bearish reporting a price target of just $55.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $9.2 billion, earnings will come to $2.7 billion, and it would be trading on a PE ratio of 17.0x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $68.49, the analyst's price target of $86.04 is 20.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.