ON Target: Is Onsemi a Buy Despite a Softer Outlook?

ON Semiconductor (NASDAQ:ON), a leading supplier of chips and sensors for the automobile industry, saw its stock price surge about 10% on Monday after reporting fourth-quarter earnings that topped analysts’ estimates.

However, the company did not meet expectations with its revenue target for the first quarter of 2024, even though it expects to grow at twice the pace of the market. The question now is whether the company (widely known as Onsemi) is a buy in what is expected to be a softer market for semiconductors.

Earnings top Q4 expectations

Onsemi’s fourth-quarter and full-year numbers for 2023 came in much better than expected, which is why the stock was running hot Monday.

To put the results into perspective, there were some concerns heading into the fourth quarter after the company cited a bump in the road caused by one client.

CEO Hassane El-Khoury explained on the third-quarter earnings call, “A single automotive OEM’s (original equipment manufacturer) recent reduction in demand will impact our $1 billion target, and we now expect to ship more than $800 million of silicon carbide (SiC) in 2023, 4x last year’s revenue.”

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Onsemi’s stock price plunged about 25% to around $62 per share on that news in late October. The company’s revenue outlook for Q4 was $1.95 billion to $2.05 billion, while its diluted earnings were projected to be between $1.10 and $1.24 per share.

Thus, you can imagine the market’s relief when Onsemi’s actual revenue for Q4 came in at the high end of the range at $2.02 billion, while its earnings exceeded expectations at $1.29 per share. The consensus estimate was $2 billion in revenue and EPS of $1.20.

On the Q4 earnings call, the CEO did not go into detail on that SiC customer and its reduction in demand, except to say that “it came exactly as we guided last quarter, and overall, it came higher than Q3.”

El-Khoury added that it was a good year overall for SiC chip shipments despite the hiccup, as Onsemi recorded the highest revenue growth in the industry, captured 25% market share, and grew its customer base to more than 600 customers.

Demand expected to soften in 2024

While Onsemi’s Q4 earnings were solid, its guidance for the first quarter fell short of what analysts had anticipated. In its outlook, the company called for revenue in the range of $1.8 billion to $1.9 billion, which is slightly below the $1.92 consensus estimate. Earnings are projected to be between 94 cents and $1.06 per share, which is less than the consensus forecast of $1.10 per share.

The SiC chips that Onsemi manufactures are in high demand among electric vehicle (EV) makers because they can handle higher voltages. However, slower growth in EV production is anticipated in 2024 as there is a lot of inventory on dealer lots, so that could impact Onsemi’s revenue.

El-Khoury also said on the earnings call that the overall market growth is projected to be slower than what analysts may be targeting.

“While market reports still project 30% or 40% growth for silicon carbide in 2024, OEMs’ latest EV plans indicate a more tapered growth, signaling a SiC market growth in the range of 20% to 30%,” he said.

However, the CEO is confident that, whatever the number comes in at, Onsemi will grow two times faster than the overall market.

“The question now is tied to end demand, and that’s why we’re still very confident in 2x the market growth,” El-Khoury said. “The question is what will the market do in 2024 based on the few announcements that have been made, but it’s demand-driven.”

Long-term growth remains promising

Obviously, investors should keep an eye on EV production in 2024, but as El-Khoury stated, it is more about long-term growth trends.

“EVs are going to keep growing; whether it’s 20 to 30, 30 to 40, it doesn’t matter. It’s going to grow, and it’s a multi-decade growth, given that the penetration of silicon carbide and EVs is still below 25%, and EVs in general are below 25%,” the CEO said.

Despite the iffy short-term outlook, Onsemi looks like a good long-term buy as it is trading at a very reasonable valuation of just 15 times earnings. Even with Monday’s run-up, the shares were dropping a bit on Tuesday, slipping about 2% as of midday, so the company’s valuation remains attractive.

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