Onsemi Earnings: Results Surpassed Expectations in the Face of Headwinds

We maintain our $97 per share fair value estimate for narrow-moat Onsemi ON after the firm reported second-quarter results and third-quarter guidance modestly above our expectations. The firm is executing well on its strategy to expand its foothold in the automotive and industrial markets, and we are pleased with its progress ramping silicon carbide, or SiC, power semiconductors. Despite numerous headwinds affecting near-term profitability, we view this as transitory, as Onsemi positions itself to secure long-term sustainable growth. With shares trading around $108, we view the stock as slightly overvalued.

First-quarter sales increased 1% year over year and 7% sequentially to $2 billion. As anticipated, top-line growth over fiscal 2023 is bumpy as Onsemi continues to exit lower-margin businesses. The firm is on track to complete this undertaking exiting 2023, and from there we expect more consistent growth supported by Onsemi’s long-term supply agreements with customers. Automotive revenue was impressively up 35% year over year and industrial sales 5% year over year, with the two making up 80% of sales. Here, demand continues to be fueled by electric vehicles and energy infrastructure, both of which use Onsemi’s SiC products.

Gross margins saw ongoing headwinds from the ramp of Onsemi’s latest fab in New York, lower factory utilization, and its SiC ramp. We view the business as resilient, with non-GAAP gross margin coming in at 47.4% and we expect headwinds to ease in 2024. Non-GAAP operating margin was down year over year, but up 60 basis points sequentially to reach 32.8%, which we view as solid.

For the third quarter, management expects revenue to reach $2.145 billion, non-GAAP gross margin of 47.0% and non-GAAP earnings per share of $1.34, all at the midpoints. We believe this sequential improvement will be driven by auto and industrial sales, however slightly offset by the exit from noncore businesses.