Investments In Automotive, Industrial, And AI Will Fuel Future Growth

Key Takeaways

• Strategic focus on automotive, industrial, and AI data centers with differentiated products aims to drive future growth and high gross margins.
  
• Acquisitions and optimized manufacturing strategy enhance growth in emerging markets and improve cost efficiency, boosting earnings and free cash flow.
  
• Geopolitical uncertainties, declining demand, and weak sector performance pose significant risks to ON Semiconductor's revenue and margin growth.

Catalysts

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

• ON Semiconductor is focusing on high-growth areas such as automotive, industrial, and AI data centers, where it continues to invest in differentiated products, anticipating future revenue growth.
  
• The company's new Treo Platform, built on advanced technology, is targeting a substantial $36 billion TAM opportunity, which could lead to significant revenue growth and high gross margins of up to 70%.
  
• Acquisitions such as the Qorvo Silicon Carbide Junction Field-Effect Transistor business are expected to accelerate growth in emerging markets like EV battery technology, potentially boosting future earnings.
  
• ON Semiconductor is executing a Fab Right strategy to streamline manufacturing, which is expected to reduce costs and improve utilization, positively impacting net margins as market conditions recover.
  
• The company plans to rationalize its product portfolio, reduce operating expenses, and optimize its cost structure, which could improve free cash flow and expand margins in the long term.

ON Semiconductor Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ON Semiconductor's revenue will grow by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.2% today to 27.0% in 3 years time.
• Analysts expect earnings to reach $2.1 billion (and earnings per share of $4.86) by about March 2028, up from $1.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.6 billion in earnings, and the most bearish expecting $1.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.9x on those 2028 earnings, up from 11.6x today. This future PE is lower than the current PE for the US Semiconductor industry at 29.4x.
• Analysts expect the number of shares outstanding to decline by 2.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.14%, as per the Simply Wall St company report.

ON Semiconductor Future Earnings Per Share Growth

Risks

• Geopolitical uncertainty and tariffs could disrupt manufacturing footprints and supply chains, impacting revenue and operational costs.
  
• Inventory digestion in key end markets and persistently weak manufacturing activity suggest potential revenue pressure and slower growth in the near term.
  
• Declining demand, especially in noncore market segments, impacts revenue visibility and poses risks to consistent growth.
  
• Weakness in the industrial sector and slower than expected ramp-up in some automotive markets, along with uncertainty in EV adoption, may limit revenue growth and pressure margins.
  
• Low utilization rates and unfavorable product mix are leading to under-absorption and pressure on gross margins in the short term.

Valuation

• The analysts have a consensus price target of $60.504 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 $85.0, and the most bearish reporting a price target of just $43.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.7 billion, earnings will come to $2.1 billion, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 9.1%.
• Given the current share price of $43.42, the analyst price target of $60.5 is 28.2% 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.