2023-05-26 09:30:16 ET
Summary
- ON stock has increased by more than 200% in 5 years and is up more than 34% YTD, yet still trades at less than 17x forward earnings.
- With an estimated CAGR of 10% over the next several years, ON is a Strong Buy with tailwinds from several megatrends propelling growth.
- Benefitting from leadership in SiC technology and AI trends also indicate that ON has potential to outperform its peers in the next several years.
While the bears and bulls fight it out so far in 2023, the bullish rally since the start of the year continues to trend upward. There is no denying that growth stocks are back in vogue as the NASDAQ is up the most of any index with a YTD performance of +25%.
One of the stocks leading the charge on the NASDAQ index is ON Semiconductor Corp ( ON ), aka onsemi. I feel that ON is a Strong Buy with substantial earnings growth estimated over the next several years due to substantial growth in the global EV industry as well as industrial end markets including decarbonization of the power grid, intelligent automation, and other megatrends that lead to opportunities for ON to develop intelligent power and sensing systems that address those needs.
From the corporate fact sheet :
onsemi is driving disruptive innovations to help build a better future. With a focus on automotive and industrial end-markets, the company is accelerating change in megatrends such as vehicle electrification and safety, sustainable energy grids, industrial automation, and 5G and cloud infrastructure. With a highly differentiated and innovative product portfolio, onsemi creates intelligent power and sensing technologies that solve the world's most complex challenges and leads the way in creating a safer, cleaner, and smarter world.
Reporting nearly $2B in revenues in Q123, the company is on track to recognize over $8B in revenues by the end of 2023 after reporting $8.3B in 2022 and analysts are expecting them to close in on $10B by 2025, based on revenue revisions and estimates reported on SA.
In the last 3 months, SA has reported 26 upward EPS revisions and 24 upward revenue revisions.
Expected EPS growth is even more impressive with estimates more than doubling in the 5-year fiscal period ending Dec. 2023 to Dec. 2027.
Despite all this impressive growth potential, the stock trades at a reasonable valuation, ever after climbing by nearly 34% YTD. At the closing price of $79.79 on 5/24/23, the stock is trading at less than 17 times forward earnings.
Who is onsemi and What Do They Make?
As the name implies ON Semiconductor is a designer and manufacturer of power and sensing semiconductor technologies for automotive, industrial, 5G and Cloud, IOT, medical, and aerospace & defense markets. The company was founded in 1969 and currently has about 33,000 employees in 43 Design centers and 19 Manufacturing sites around the world.
The company is well aligned with fast-growing secular trends in automotive and industrial end markets, including the burgeoning global EV industry. Significant margin expansion is being driven by manufacturing consolidation, portfolio optimization and diversification. They have significant growth in free cash flow. The company is successfully undergoing a transformation under new leadership, and they are making excellent inroads into select end markets where they have become industry leaders.
For example, onsemi is an industry leader in SiC (Silicon Carbide) technology and has forged deals with EV automakers including Tesla ( TSLA ), VW, Mercedes Benz, and others.
On May 16, they announced a deal with Kempower to provide EliteSIC MOSFETs and diodes for Kempower electric charging stations.
By incorporating onsemi's EliteSiC MOSFET technology, Kempower's EV charging solutions will benefit from superior power, performance and reliability. With low ON resistance and minimal gate and output capacitance, EliteSiC power devices exhibit lower power losses at high operating frequencies, leading to increased system efficiency and reduced end system size. These advantages translate into higher power density and greater overall reliability for Kempower's EV charging solutions.
The intelligent sensing and intelligent power technologies that ON delivers drive market growth in the EV and industrial end markets, with 7 to 9% CAGR estimated between 2021 and 2025.
According to Deloitte Insights , the global EV industry is growing quickly based on the share of passenger car and light duty vehicles sold each year, with as much as 30% of global market share expected to be made up of EVs by 2030. Most of that market share will be in China with EVs accounting for nearly 50% of market share by 2030, 42% in Europe and 27% of US sales. The automotive end market represents about 50% of the total revenues from ON and the EV automotive market is growing rapidly, which is driving innovation in the industry. Auto and Industrial is expected to grow to 75% of revenues this year from 60% in 2021.
During the 51st Annual JP Morgan Global Technology, Media and Communications Conference call transcript , JPM Analyst Harlan Sur asked this question:
I'd like to - on the financial targets that you put out last week, 10% to 12% revenue CAGR, 53% gross margins, 40% operating margins and 25% to 30% free cash flow margins. The team has been defocusing away from low gross margin businesses, right, over the past number of years.
The response from Thad Trent, EVP and CFO of onsemi explained their strategy:
If you think about the improvement steps of where we are to get to that 53%, a big component of that is mix. And it's two components of mix. One is auto and industrial, as we flex more there, which we've been doing. Last year, we were roughly 73% auto and industrial. In Q1, we're 79%. If you fast forward, we're going to be 85% auto and industrial. But the other component is the mix to this higher-value product, proprietary products that drive higher gross margin.
And gross margins have been improving considerably over the past 2 years as illustrated in this screen capture from a slide in the Q123 Investor presentation .
Other industrial solutions include energy infrastructure such as solar energy inverters, energy storage, and EV fast charging solutions. Other industrial automation solutions include connected lighting, security and surveillance cameras, machine vision, autonomous mobile robots, and industrial motor drives. Computing and communications solutions include 5G radio units, server power solutions, rack power supplies, bus protection, core and auxiliary power, and telecom infrastructure.
Another trend is developing towards smart buildings that use Artificial Intelligence to incorporate sensors and big data to control energy usage and emissions as explained in this research paper . This is another emerging trend that presents additional opportunities for ON to capture market share.
Because building energy systems increasingly integrate sensors and embedded components, buildings are becoming complex networked cyber-physical energy systems.
As they illustrate in this slide from the Q123 investor presentation, intelligent power and sensing go hand in hand to drive innovation and "massive disruption" in automotive and industrial applications as well as provide opportunities to cross over into adjacent markets like Cloud and Telecom.
I have spoken in previous articles about the 4th Industrial Revolution and how companies like onsemi are ushering in the disruptive processes and technologies that enable it. By integrating sustainable business practices that harness converging technologies like AI, intelligent sensors, big data, and human powered processes that integrate the physical, digital, and biological worlds we can make positive advances that enable a future that is better and more inclusive for everyone. ON is well positioned to participate in that revolution and have won several awards that recognize the sustainable business practices and ESG initiatives that they embrace as an organization.
Peers and Competition
Although not really a competitor and only a peer in the sense that they also are in the semiconductor space, Nvidia reported Q1 results that smashed expectations, stunned investors and offered substantially increased guidance.
The CEO, Jensen Huang, reiterated his stance that the "iPhone moment" for AI is here. That report makes it clear that the AI revolution (an integral aspect of the 4th Industrial Revolution) is here to stay and not just a passing fad as some would have you believe. Some of the ways that ON benefits from the AI trend includes these results from a quick search of the company website :
Other peers in the industry include Marvell Technology ( MRVL ), Globalfoundries ( GFS ), Microchip, STM, and NXP Semiconductors ( NXPI ). In the past 1 year and YTD, ON has outperformed all of them.
Summary
In the past 5 years, the price of ON stock has increased by more than 200% and I expect that it will continue to increase in value over the next 5 years as automotive revenues and industrial end market solutions continue to grow at a rate of about 7-10% CAGR. Boosted by the megatrends that are occurring as part of the 4th Industrial Revolution including the use of AI to improve industrial automation, EV adoption, and the renewable energy transition, ON stands to gain market share, continue to improve gross margins and grow EPS.
By 2027 with estimated EPS of over $10, the stock could easily trade for upwards of $200 at a reasonable multiple of 20x earnings. By the end of 2023, EPS could surpass $5 as estimates are revised, with a short-term price target of $100, representing an upside of about 20%s from the current share price of just under $80.
With 29 Wall Street analysts following ON stock, 17 rate ON a Strong Buy, 3 a Buy, and 9 Hold ratings.
My sense is that ON will continue to grow EPS and improve gross margins as they expand product offerings and focus more on specialized products that leverage their current leadership in SiC technology. I rate the stock a Strong Buy at a price below $80.
For further details see:
ON Semiconductor: Intelligent Technology, Better Future, Strong Growth