ON Semiconductor Corporation (NASDAQ:ON) ("OnSemi") is one of our favorite stocks in the semis peer group. We rate OnSemi stock a buy because the company is one of the best-positioned semi names. We predict ON will continue to grow with increased exposure to automotive and power IC markets and recommend investors buy in now.
As tech analysts, our job is to identify stocks positioned for growth and price breakout. Not many buys present themselves with current market sell-offs, but ON is among the exceptions. ON's new CEO, Hassan El-Khoury, is strategically walking away from low-margin businesses and is focused on high-margin businesses. Gross margins continue to improve, with the company reporting a gross margin of 49.1% in the most recent quarter, up from 45% in 4Q21 and 41.5% in 3Q21. On Semis, prospects continue to improve, and we invite investors to join the ride.
OnSemi is a power company for the most part, and power demands are on the rise. Why do we care that OnSemi is a power company? The answer is simple: power is the biggest analog market comprising 25.5% of total analog semis, as shown in the 2022 Analog IC sales forecast table. Our confidence in the power market is based on increased demand levels. As the demand for power electronic modules increases, which it currently is, the demand for chips that manage the power will increase. We are buy-rated on OnSemi stock because the company is at the heart of the power management business.
We believe OnSemi is well-positioned within the power market with a wide range of ''power discrete and module products" (MOSFET, IGET, etc.). ON operates in three sectors: automotive, industrial, and "others" (mainly computing). The table from ON's 2021 10K shows the business breakdown across the three segments of its business. Automotive has been rising in recent quarters with the global shift away from combustion engines toward Electric Vehicles (EVs). The industrial sector also shows meaningful opportunities with machine vision applications and sensor content increase in robotics. We believe ON will penetrate verticals in these three markets and subsequently foresee materially higher margins and earnings for ON in the coming quarters.
Today, the power business is not about small batteries. PCs and cell phones are not in the spotlight of the power industry anymore. The new focus is on the booming automotive market. Currently, EVs are the new "cell phones" and require vast power. The graph shows the projected global automotive semiconductor market size from 2019 to 2023. According to the most recent reports by Research Dive, the global automotive semiconductor market is predicted to rise at a CAGR of 12.2% in the 2021-2028 timeframe. We believe the automotive market is at the core of ON's growth over the next few years.
OnSemi is making sure Automotives take up a more significant part of their business. The graph from OnSemi's earnings from Q4 '21 and Q1'22 shows how OnSemi is augmenting its exposure to the automotive and industrial markets. Automotives and industrial make up 65% of the company's revenue, and we predict this number will only increase in the coming quarters. OnSemi's focus on the automotive market and the market's global appreciation make us confident about the company's future and our buy rating on the stock.
We also believe OnSemi has promising prospects in the automotive sector because of its end-market customers. The company deals with top automakers jumping on the EV bandwagon (Toyota, Volkswagen, Ford, etc.). OnSemi's partnerships with automakers strengthen the company's growth prospects in the sector. The graph from ON's recent earnings shows the company's growth on the automotive and industrial fronts, both of which interact positively with EVs. We see a favorable market backdrop for the company and advocate the stock as a buy on this premise.
OnSemi could not be more bullish in regards to growth prospects. Revenue is $1.85B, up 6% on QoW and 28% on YoY. This is a company on its way up. Despite the company's price increase, demand did not slow down. This makes us extremely optimistic about future revenue growth and the company's operational leverage. The company has beaten estimates in each of the last several quarters, and we expect the company to do so in the future.
We also see the company's growth mindset in its recent acquisition of GT Advanced Technologies. GTAT will enhance ON's supply of Silicon Carbide ('SiC') materials. The image shows that Silicon Carbide materials are necessary for manufacturing SiC-based power devices and touch upon multiple end markets. The Industry Arc also forecasts the SiC power devices market to grow at a CAGR of 41.8% by 2026. We believe OnSemi was thinking ahead when it purchased GTAT because the company has now secured its silicon supply. We strongly believe OnSemi is not only growth-oriented but future-oriented, and recommend buying into the company's future.
OnSemi stock had a remarkable run. The stock rose 250% over the last five years compared to its top competitor Infineon Tech (OTCQX:IFNNY), which grew 35% during the same period. Like most of its peer group, ON stock surged around March 2020 with the spread of the pandemic. The stock is down 26% on YTD, and we believe the downward draft is not specific to OnSemi but a result of the market sell-off. We believe automotive demand momentum will carry the stock in coming quarters, and we expect ON profitability to increase over the next few quarters. We would not be surprised if the stock hits its fifty-two-week high in the $70s range towards 2023.
We believe OnSemi is both a value pick and a growth pick. We believe the stock is undervalued, trading at around $55 per share. On the P/E basis, OnSemi is trading at 11.1x C2023 EPS of $4.99 compared to 14.4x for the semiconductor peer group. The stock is trading at 3.0x EV/C2023 sales versus the peer group average of 4.5x. We strongly advise investors to buy into ON at current levels because it will not always be this cheap.
The following chart illustrates the semiconductor peer group valuation table.
The overall market sentiment/consensus is a buy. Out of the 30 analysts, 22 analysts are buy-rated, while the remaining eight are for a hold. OnSemi is currently trading at around $55. The sell-side median price target is $74, and the mean is $73, for an upside in the range of 33-35%.
The following chart indicates ON stock's sell-side ratings and price targets:
We are bullish on OnSemi and recommend investors buy shares on all dips. We believe OnSemi will continue to outperform its peer group and market expectations. The company beat estimates in Q1 '22 earnings, and we expect this outperformance to continue towards 2023. We believe ON is at some risk of double ordering from its customers, but we believe the company remains well-positioned to outperform its peer group in the next few quarters. We predict OnSemi will continue to capitalize on the automotive market demand and expect the company to beat consensus revenue and EPS estimates, driving the stock higher.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in ON over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.