Thursday, June 8Welcome

Stands out for onsemi execution and auto-leverage, but macros loom as a headwind (ON)

Powerful IGBT transistor isolated on white background

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i was pretty strong on-semi (NASDAQ: ON) It returned in March due to the company’s strong margin leverage performance and exposure to rapidly growing semiconductor opportunities such as advanced power (specifically silicon carbide (or SiC)). . Despite the subsequent gradual decline in stock prices, Nearly 30% above the SOX index supports the popular belief that this is a significantly better than average semiconductor story.

Since the beginning of the year, I have been drumming that the semiconductor market would slow down. Onsemi has some negative exposure to industrial end markets (especially legacy products) as well as non-automotive/non-industrial markets that are likely to weaken in 2023, but Onsemi has I believe it will do better than the market. In addition, we believe there is an opportunity for continued revenue and margin growth that sets this apart in its space.

Valuations are still positive, but onsemi’s relatively better relative performance has mitigated some of its appeal in relative terms. I think it will be happy for a few years, but it risks a rockier performance in the next year or two.

Beat go on driven by strong automatic performance

The semiconductor company continues to disappoint, even though the hurdles are much higher.

onsemi’s third quarter revenue increased 26% year-over-year and 5% quarter-on-quarter, exceeding expectations by more than 3%. Growth again led by the Automotive and Industrial segments (together +41% YoY, +9% QoQ), with Automotive +52% / +11% (over 6%) and Industrial +28% / It was up 5% (up from the previous quarter). 3%). The ‘Other’ category, which includes products for the consumer, computing and communications markets, increased 3% year-over-year and decreased 2% sequentially. The company also abandoned $39 million in non-strategic, low-margin businesses to meet his $277 million long-term goal of $750 million.

Gross margin was up almost 8 points year-on-year (but down 40bp quarter-on-quarter) to 49.3%, up about 25bp. Operating profit was up 82% year-over-year and up 8% sequentially to 9%.

Inventories were up 19% year-over-year and up 1% quarter-on-quarter and days of inventory were 126, up 8 days year-over-year and down 9 days sequentially. Channel inventories hit an all-time low for him in just under seven weeks.

Auto power on

onsemi’s automotive sales were very strong in the quarter, with continued strong demand for chips used to grow electric vehicle (EV) and advanced driver assistance system (ADAS) components, as well as traditional electrical systems. motor vehicle.

While I believe higher interest rates and a weaker macro environment are not good news for the auto sector looking to 2023, ford (F) and general motors (GM) both report improved supply chains and leaner inventories, so the outlook isn’t too bad at this point. In addition, given the continued launch of hybrid and fully electric vehicles, as well as ICE-equipped vehicles with more electrical systems (such as electrical stability control), onsemi has an overall unit demand Even with the soft market, there is significant vehicle content growth opportunity.

The long-term outlook also remains bright. Earlier this year, there were rumors that the company had acquired the inverter and/or car charger business. Tesla (TSLA) and ST Microof (STM) Expenses considering previous single-source status. Management hasn’t explicitly confirmed that, but the company significantly increased its SiC guidance shortly after these rumors. Earnings in 2023”.

Victories like this are important, but there’s another part of the on-semi car story that’s often overlooked. Opportunity to use SiC wins to acquire additional content for add-on products such as gate driver modules and secondary IGBTS.

Like other markets, the industry could slow down

With lead times starting to shrink and talk of order cancellations rising, there’s no question that semiconductor demand is softening heading into 2023.electric appliances). Data center demand appears to be slowing, as is demand for some of his 5G-related hardware.

Again, this is a matter of short-term prospects and long-term opportunities. In the short term, I think we’ll see short-cycle slowdowns in many industries. In addition to slowing the pace of data center and telecom growth, the consumer market is also expected to slow significantly.

However, in the long term, we strongly believe in the opportunities of automation and electrification across a wide range of industries, which will drive the effective on-semi market growth over the next decade. Also, as in the case of automobiles, not only is the overall addressable market growing, but so are the opportunities for higher value components (such as SiC chips) in markets such as solar. Major OEM.


Longer term, onsemi will impact not only the electrification of vehicles (and higher ADAS adoption), but also the electrification of many industrial end markets with the growth and volume of its compelling content. give. However, in the short term, weaker demand will put pressure on onsemi’s revenue growth.

I also expect the company to face continued margin pressure. The company has made excellent progress in its efforts to improve margins. This year’s average sell-side gross margin estimate has improved by 12 points over the past two years, and operating margin estimates have more than doubled. However, there are headwinds in the short term. now.

First, adding additional SiC capacity would have a negative impact on margins, and the company needs that capacity to meet its long-term commitment of more than $4 billion. Second, the company has cut wafer starts (currently about 75% of its capacity) and may cut further to manage inventory entering periods of weak demand. This has implications as semiconductor gross margins tend to be very sensitive to utilization rates. These are all understandable things, and they don’t change the company’s long-term potential, but the reality is that Wall Street can be fickle, emotional, reactive, and say, ‘Oh, gross margins. Rates are declining!” could weigh on sentiment and multiples in the short term.

Over the long term, the company expects nearly 9% annualized revenue growth. Similarly, we expect further margin his leverage to push his adjusted FCF margin to his low to mid 20%. FCF growth in numbers.


Discounted cash flows suggest long-term annualized double-digit total returns from today’s prices and we believe they are an attractive entry point for companies looking to capitalize on long-term long-term growth opportunities. increase. We also value semiconductor stocks based on his EV/earnings and EV/EBITDA driven by margins. In normal markets, Onsemi’s fair value is still in the low $80s based on 2023 operating margin expectations, and even low cycle multiples support fair value in the low $70s.

As the semiconductor sector heads toward a cyclical correction, we do not want to underestimate the risks. onsemi could hit revenue and margins harder than I expected, and the market reaction could be worse than I expected. Still, long-term rewards look attractive to investors who can tolerate these short-term risks.

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