Electrification And AI Will Ignite A New Era

Key Takeaways

• Structural manufacturing improvements and rapid utilization recovery could yield outsized margin and earnings gains, well beyond current market expectations.
  
• Dominance in EV, AI data centers, and industrial sensing, alongside a resilient global supply chain, sets ON to far outperform on growth and profitability.
  
• Vulnerability to trade barriers, automotive sector cyclicality, execution risks in new technologies, intensifying competition, and portfolio shifts could constrain ON Semiconductor's revenue and margin growth.

Catalysts

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

• Analyst consensus expects gross margin expansion as the market recovers, but this may dramatically understate ON's potential, as their structural reduction in manufacturing capacity combined with a rapid recovery in utilization could unlock operating leverage much faster, resulting in an outsized and rapid step-change in gross margin and earnings power by 2026.
  
• While analysts broadly agree that silicon carbide expansion will drive growth, the ongoing wins with leading Chinese EV makers and new OEM platforms, coupled with ON's flexibility to supply both dies and modules for high-volume and high-efficiency applications, suggest the company is poised to dominate emerging segments in global vehicle electrification, significantly surpassing current revenue expectations.
  
• ON's early-mover advantage in next-generation AI data center power architectures in partnership with XPU leaders like NVIDIA positions the company to capitalize on the exponential increase in semiconductor content per watt, placing their power products at the center of two structural growth curves-AI and high-power efficiency-thus opening up a far bigger total addressable market and durable earnings tailwind.
  
• The Treo platform's design funnel is expanding at a breathtaking pace, with doubled customer sampling year-on-year and a clear path to a billion-dollar revenue target, indicating that ON may soon transform its industrial and sensing verticals into growth powerhouses with structurally higher margins, supporting accelerated enterprise-wide margin uplift.
  
• ON's diversified global manufacturing footprint not only shields it from acute geopolitical risk but also poises it to capture outsized share as customers prioritize resilient supply chains and local sourcing-an increasingly important premium that is likely to support both above-industry revenue growth and sustained pricing power over the next decade.

ON Semiconductor Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on ON Semiconductor compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming ON Semiconductor's revenue will grow by 7.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 7.3% today to 32.0% in 3 years time.
• The bullish analysts expect earnings to reach $2.5 billion (and earnings per share of $6.03) 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 bullish analyst cohort, the company would need to trade at a PE ratio of 13.5x on those 2028 earnings, down from 41.5x today. This future PE is lower than the current PE for the US Semiconductor industry at 28.6x.
• 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 10.93%, as per the Simply Wall St company report.

ON Semiconductor Future Earnings Per Share Growth

Risks

• ON Semiconductor's significant exposure to China, while currently a growth driver, leaves it vulnerable to rising trade barriers, deglobalization, and increased global focus on technological self-sufficiency; adverse policy shifts or local competition could restrict access to key markets and lead to declining future revenues.
  
• The company's heavy reliance on the automotive sector, particularly electric vehicles, exposes it to cyclicality and weak demand in North America and Europe, which management openly acknowledged; continued regional softness or a slower-than-expected recovery could result in revenue volatility and uncertainty around long-term earnings.
  
• Execution risk in next-generation technologies such as silicon carbide and Treo power platforms is high-delayed qualification, slower customer adoption, or underutilization of new fab capacity could lower ON Semiconductor's market share, depress gross margins, and impair revenue growth.
  
• Intensifying global competition-especially from Asian foundries and integrated device manufacturers-combined with the industry trend of commoditization for standard components, threatens to put persistent downward pressure on average selling prices, which could erode ON Semiconductor's long-term gross margins and limit net margin expansion.
  
• Ongoing portfolio rationalization and the ramp-down of lower-margin or legacy products will lead to a non-trivial annual revenue headwind, with management expecting at least five percent of current revenue to disappear by next year; unless higher-margin segments scale quickly, earnings and cash flow growth could stall relative to expectations.

Valuation

• The assumed bullish price target for ON Semiconductor is $70.0, which is the highest price target estimate amongst analysts. 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be $7.9 billion, earnings will come to $2.5 billion, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 10.9%.
  
• Given the current share price of $47.24, the bullish analyst price target of $70.0 is 32.5% 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.