Onsemi Earnings: Shares Look Cheap for Long-Term Buyers After Short-Term Headwinds Spur a Selloff

We trim our fair value estimate for shares of narrow-moat Onsemi ON to $94, from $97, after it reported solid third-quarter results, but its guidance missed our expectations. Onsemi is expecting lower silicon carbide, or SiC, revenue in the remainder of 2023, behind a large order pushout in its automotive business. The firm is also absorbing manufacturing underutilization costs that weigh on margins as it adjusts for lower overall chip demand this year. Despite 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 level of selloff for the stock well 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 silicon carbide targets were less optimistic than we’d been expecting. 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.