Fab-Right And Silicon Carbide Expansion Will Unlock New Markets

Key Takeaways

• Fab-Right strategy and R&D investments are set to increase margins and enhance product differentiation as the market rebounds.
  
• Automotive and AI data center sectors are poised for revenue growth through silicon carbide innovations and operational efficiencies.
  
• Strategic cost control efforts are overshadowed by declining margins and revenue, with challenges in automotive and geopolitical risks impacting growth and earnings.

Catalysts

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

• The implementation of the Fab-Right approach and ongoing investments in R&D aim to deliver differentiated products, which are expected to lead to gross margin expansion as the market recovers.
  
• The expansion of their silicon carbide technology with leading automotive OEMs, including being designed into new platforms such as plug-in hybrid electric vehicles (PHEVs), is expected to boost revenue and market share in the automotive sector.
  
• Growth in AI data center revenues is anticipated through their silicon carbide and silicon power devices, with expectations to increase revenue for uninterruptible power supply systems by 40% to 50% in 2025, positively impacting earnings.
  
• Efforts to enhance operational excellence, including reducing fab capacity and restructuring to create sustainable efficiencies, are projected to expand both gross and operating margins and increase free cash flow.
  
• Plans to increase share repurchase to 100% of free cash flow in 2025, coupled with a strong balance sheet and liquidity position, may drive significant EPS growth.

ON Semiconductor Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ON Semiconductor's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.5% today to 25.2% in 3 years time.
• Analysts expect earnings to reach $1.9 billion (and earnings per share of $4.74) by about May 2028, up from $633.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.2 billion in earnings, and the most bearish expecting $1.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.8x on those 2028 earnings, down from 25.4x today. This future PE is lower than the current PE for the US Semiconductor industry at 22.5x.
• Analysts expect the number of shares outstanding to decline by 2.87% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.95%, as per the Simply Wall St company report.

ON Semiconductor Future Earnings Per Share Growth

Risks

• Despite strategic cost control measures, ON Semiconductor is experiencing a continued decline in gross margins due to lower revenue and manufacturing underutilization, posing a risk to net margins.
  
• The company is facing challenges in the automotive sector, with revenue decreasing 26% sequentially in Q1, which could pressure overall revenue growth as other markets recover unevenly.
  
• The potential impact of geopolitical tensions and tariffs, although currently assessed as minimal, remain a looming risk that could adversely affect earnings if the situation changes.
  
• ON Semiconductor is using pricing strategies to defend or increase market share in certain areas, which could lead to competitive pricing pressures and affect short-term revenue and margins negatively.
  
• Inventory digestion continues to be a concern across markets, particularly in automotive, where demand reductions and cautious customer behavior could lead to further backing up in inventories, affecting cash flow and net earnings.

Valuation

• The analysts have a consensus price target of $48.227 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 $72.12, and the most bearish reporting a price target of just $33.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.6 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 12.8x, assuming you use a discount rate of 10.0%.
  
• Given the current share price of $38.51, the analyst price target of $48.23 is 20.1% 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.