ON Semiconductor's (above 3.56%) Last year's 24.5% decline kept long-term growth stocks deep in value territory as the market may have overreacted to weakness in major end markets over the past 18 months. The long-term view of the stock price is compelling, so there's plenty of reason to buy the stock on the downtrend.
Introducing ON Semiconductor, a smart growth stock
This semiconductor company produces intelligent power solutions and intelligent sensing technologies used in a variety of industries. However, its two major end markets are industrial and automotive.
In the automotive sector, the company's power solutions, particularly silicon carbide chips for electric vehicles (EVs), help automakers reduce vehicle weight and extend range. Additionally, its intelligent sensing technology is useful for imaging and sensing used in advanced driver assistance systems (ADAS).
On the other hand, the long-term case for industrial end markets is equally compelling. Intelligent sensors are a key part of the digitalization of factories and buildings, helping them become “smart” by creating data to analyze and iteratively improve efficiency in real time.
There are great prospects in both major end markets. There is little doubt that EVs and ADAS are the future of the automotive industry, and the productivity gains brought about by industrial automation and software (particularly advanced AI analytics) will drive investment in smartly connected factories and buildings. will definitely increase in the future.
Image source: Getty Images.
What's at stake for ON Semiconductor in 2024?
The chart below shows the weakness in the end market over the past 18 months. It wasn't an easy environment. For example, in the industrial sector, the widely followed Supply Management Institute Purchasing Managers' Index (PMI) has fallen below 50 every month since November 2022, with the exception of one month in March 2024. A lower reading indicates a contraction in the manufacturing economy). .
Looking at the automobile market, it is no secret that relatively high interest rates are making auto loans more expensive and suppressing automobile sales and production. Additionally, it's worth noting that many automakers brought forward investments in EVs during the pandemic, which has contributed to high interest rates reducing demand and flooding the market with models.
The cold winds of a slowdown in the EV end market first hit the company in the fall of 2023, with management raising its full-year forecast for silicon carbide chips for the automotive sector in 2023, up from its previous forecast of $1 billion in December 2020. It had to be lowered to $800 million. This is because one customer has reduced their demand.
There was a similar disappointment in 2024, with CEO Hassan El Khoury saying in an October earnings call that “our silicon carbide revenue will grow by low to mid-single digits compared to 2023.'' “We expect it to be,” he told investors.
Data source: ON Semiconductor. Graph by author.
recovery takes time
Unfortunately, there is nothing the company can do about determining end markets, interest rates, and spending cycles in the industrial and EV worlds. Additionally, don't expect a sharp rebound in sales anytime soon. El Khoury's comments in October gave no reason to expect that. “For the past few quarters, we have been talking about an L-shaped recovery,” he said, adding, “The demand environment remains weak with continued destocking and slowing final demand. Uncertainty remains. As this continues, our outlook for all markets remains unchanged.” are our customers. ”
El Khoury's cautious approach to guidance and commentary is a good thing, as it prevents too much optimism from permeating the stock.
Why ON Semiconductor is a great value stock for 2025
That said, ON Semiconductor doesn't need a rapid growth rebound to become a great value stock. It currently trades for 2024 earnings per share of $4, 15.7 times Wall Street's expectations. Additionally, Wall Street's expectations for 2025 look conservative, with sales growth of just 4.2% and earnings per share (EPS) of $4.29, a multiple of 14.6. Estimated revenue for 2025.
Image source: Getty Images.
These aren't harsh assessments for a company whose best days are yet to come. The semiconductor market is notoriously cyclical, and the current downturn is causing anxiety among investors in the sector. Still, it's not a question of if, but when, ON Semiconductor's market recovers cyclically, and if 2024 turns out to be the bottom in earnings, investors could expect to see the company's stock in 2025. You can expect a significant return.
If this valuation is maintained, the stock will be worth holding forever due to its strong upside potential.
