Onsemi Earnings: Stock Looks Attractive After Short-Term Headwinds Spur Selloff

Key Morningstar Metrics for ON Semiconductor

• Fair Value Estimate: $94.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of ON Semiconductor’s Earnings

We’ve trimmed our fair value estimate for ON Semiconductor’s stock to $94 from $97 after the company reported solid third-quarter results, and the company’s guidance missed our expectations. Onsemi is expecting lower revenue for silicon carbide, or SiC, over the remainder of 2023 based on a large order pushout in its automotive business. The firm is also absorbing manufacturing underutilization costs, which weigh on margins, as it adjusts for lower overall chip demand this year.

Despite these short-term headwinds, we are confident in Onsemi’s long-term focus on electrification in automotive and industrial applications. We see the firm as primed for strong growth and margin expansion after this period of weaker demand. Shares dropped as much as 19% on the weaker outlook, leaving it undervalued, in our view. We think the amount of selloff overshadows the level by which Onsemi’s guidance missed our expectations.

Onsemi’s fourth-quarter guidance slightly missed our model, and management commentary around 2024 and its SiC targets were less optimistic than we expected. Fourth-quarter guidance calls for a 7% sales decline and nearly 100 basis points of gross margin compression sequentially. Onsemi now expects above $800 million in SiC revenue in 2023, down from its previous target of $1 billion. Management also expects a sequential sales decline in the first quarter.

Third-quarter sales dropped 1% year over year but rose 4% sequentially to $2.18 billion. Onsemi’s results this year have been challenged by softening chip demand, including inventory digestion at automotive customers and weaker industrial spending. Still, the automotive business impressed again, rising 33% year over year and 9% sequentially. Positively, silicon carbide revenue eclipsed $250 million in the quarter, which was almost 50% higher than the firm’s figure in the second quarter.