Silicon Carbide Technology And Tactical Partnerships Drive Market Outperformance And Revenue Surge

Key Takeaways

• ON Semiconductor's strategic investments in automotive, industrial, and AI data centers are poised to drive revenue growth and expand margins through megatrend alignment.
  
• The company's focus on silicon carbide technology and partnerships, like with Volkswagen for electric vehicle power solutions, signals strong market positioning and potential new revenue channels.
  
• ON Semiconductor faces revenue instability due to fluctuating demand, geopolitical risks, and intense competition in key sectors like automotive and AI data centers.

Catalysts

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

• ON Semiconductor's strategic focus on high-growth megatrends in automotive, industrial, and AI data centers with significant investments in power and sensing technologies positions the company for top-line growth and gross margin expansion, impacting revenue and net margins.
  
• The company's advancement in silicon carbide (SiC) technology, particularly in automotive and industrial applications, is expected to outgrow the market by 2x in 2024, driving revenue growth due to increased demand for efficient, reliable, and compact systems.
  
• ON Semiconductor's collaboration with Volkswagen Group as the primary supplier of power box solutions for next-generation electric vehicles, underpinned by a multiyear investment in a vertically integrated SiC manufacturing facility in the Czech Republic, aims to meet rising demand for SiC modules, enhancing revenue and solidifying market positioning in Europe.
  
• The acquisition of SWIR Vision Systems to add short wavelength infrared technology to its portfolio, along with the development of analog and mixed-signal product families for diverse applications, signals robust R&D investments that are likely to lead to new revenue streams and maintain technological leadership.
  
• With a strong focus on financial discipline, including share repurchases and capital allocation towards future growth areas while maintaining operational efficiency, ON Semiconductor positions itself for improved earnings per share and shareholder value in the face of market recovery.

Assumptions

• Analysts are assuming ON Semiconductor's revenue will grow by 5.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 24.8% today to 28.9% in 3 years time.
• Analysts expect earnings to reach $2.7 billion (and earnings per share of $6.86) by about August 2027, up from $1.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.7 billion in earnings, and the most bearish expecting $2.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.2x on those 2027 earnings, up from 15.2x today. This future PE is lower than the current PE for the US Semiconductor industry at 25.7x.
• Analysts expect the number of shares outstanding to decline by 0.74% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.26%, as per the Simply Wall St company report.

Risks

• Ongoing inventory correction in automotive and industrial sectors could lead to fluctuating demand impacting revenue stability.
  
• Dependence on the recovery of the automotive sector, particularly with electric vehicles (EVs), which could face slowdowns or lower-than-expected growth, potentially affecting revenue from this segment.
  
• Substantial investment in new technology and manufacturing capabilities (e.g., silicon carbide expansion in the Czech Republic) presents execution risks that could influence net margins if not managed effectively.
  
• The global semiconductor market's uncertainties and potential geopolitical risks, especially with significant operations and revenue coming from China, might affect earnings due to shifts in trade policies or economic conditions.
  
• Intense competition in high-growth areas such as automotive, industrial, and AI data centers could pressure both prices and market share, impacting net margins and earnings if onsemi cannot maintain its competitive edge in innovation and delivery.

Valuation

• The analysts have a consensus price target of $86.64 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 $106.0, and the most bearish reporting a price target of just $60.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $9.3 billion, earnings will come to $2.7 billion, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $68.51, the analyst's price target of $86.64 is 20.9% 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.