Geopolitical And Tariff Risks Will Compress Margins Despite EV Trends

Key Takeaways

• Rising geopolitical tensions, supply chain localization, and regulatory uncertainty are likely to raise costs and compress profitability for ON Semiconductor over the long term.
  
• Market overcapacity, intense competition, and technological disruption risk margin erosion, revenue volatility, and delayed improvement in cash flow and earnings.
  
• Strong industry demand, strategic partnerships, operational improvements, and innovation in high-growth technologies position ON Semiconductor for greater market share, profitability, and long-term growth.

Catalysts

Provides intelligent sensing and power solutions in Hong Kong, Singapore, the United Kingdom, the United States, and internationally.

• Despite management optimism, the persistent risk of rising geopolitical tensions, regulatory uncertainty-especially around tariffs and sustainability mandates-and the push for localized supply chains are set to increase operating costs, disrupt ON Semiconductor's global manufacturing operations, and compress net margins over the long term.
  
• Intensifying competition and potential overcapacity in power management and silicon carbide products threaten to erode prices and result in higher inventory levels, making it more difficult for ON Semiconductor to achieve sustained revenue growth and jeopardizing margin expansion targets.
  
• High customer concentration in cyclical end markets like automotive and industrial creates a vulnerability to demand disruptions, with sluggish recoveries in North American and European automotive segments likely leading to more volatile revenues and uneven cash flows.
  
• The company's ongoing capital-intensive investments in silicon carbide capacity and next-generation technologies, in combination with a slower-than-anticipated ramp in key markets such as EVs and industrial automation, may delay improvements in free cash flow and net margins, undermining long-term earnings growth.
  
• The rapid pace of innovation and risk of disruptive new power technologies-including potential advances in alternatives to SiC-could shorten product lifecycles and necessitate ongoing, costly reinvestment, putting further pressure on ON Semiconductor's return on capital and future profitability.

ON Semiconductor Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on ON Semiconductor compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming ON Semiconductor's revenue will grow by 2.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 7.3% today to 24.3% in 3 years time.
• The bearish analysts expect earnings to reach $1.7 billion (and earnings per share of $4.32) by about August 2028, up from $465.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.5x on those 2028 earnings, down from 41.8x today. This future PE is lower than the current PE for the US Semiconductor industry at 29.1x.
• Analysts expect the number of shares outstanding to decline by 4.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.92%, as per the Simply Wall St company report.

ON Semiconductor Future Earnings Per Share Growth

Risks

• Secular trends in electrification, renewable energy, industrial automation, and AI data centers are driving robust, long-term demand for ON Semiconductor's core products, which could support sustained revenue growth even during short-term market fluctuations.
  
• ON Semiconductor's deepening partnerships with major global OEMs, especially in the growing Chinese EV market and with innovative leaders like NVIDIA in the AI data center space, position the company to benefit from high-visibility, stable, and potentially expanding future cash flows.
  
• Aggressive structural improvements, disciplined cost management, the Fab Right initiative, and a transition toward higher-margin, differentiated products are directly aimed at improving operating efficiency, net margins, and long-term profitability.
  
• The company's growing leadership in silicon carbide and next-generation wide bandgap semiconductors, coupled with an expanding product pipeline (such as Treo and AI-targeted solutions), positions ON Semiconductor to take share in key high-growth markets, which could boost both revenue and margins.
  
• As semiconductor content per vehicle and the need for energy-efficient solutions increase worldwide, ON Semiconductor's technological edge and global manufacturing flexibility could provide resilience and margin expansion, improving the outlook for earnings and cash flows over the long term.

Valuation

• The assumed bearish price target for ON Semiconductor is $42.76, which represents two standard deviations below the consensus price target of $57.67. This valuation is based on what can be assumed as the expectations of ON Semiconductor's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $70.0, and the most bearish reporting a price target of just $40.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $6.8 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 10.9%.
  
• Given the current share price of $47.66, the bearish analyst price target of $42.76 is 11.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.