Onsemi Could Be Set Up For a Solid Rebound: Here's Why

Core Viewpoint - Onsemi has faced a challenging 2024 with a 12% decline in share price, underperforming compared to the Invesco PHLX Semiconductor ETF, which is up 22% this year. However, there are indicators suggesting potential recovery for the company [1]. Company Overview - Onsemi, formerly known as ON Semiconductor, primarily manufactures chips for automotive (52% of revenue) and industrial (28% of revenue) applications, with the remaining 20% from data centers, 5G, and other sources [1]. - The company is a leader in silicon carbide chips, which are more energy-efficient than traditional silicon, particularly beneficial for electric vehicles (EVs) [2]. Market Position and Growth Potential - Silicon carbide is currently used in only 22% of EV production, and without Tesla, the penetration drops to 6%. This indicates significant growth potential for Onsemi's silicon carbide products [2]. - Despite a 1% revenue drop in 2023 and a 17% decline in Q2 2024, the overall EV market is showing resilience, with global EV sales volumes up 22% in the first half of 2024 compared to the same period in 2023 [4][5]. Financial Performance - Onsemi has maintained a gross margin of 45%, with a decrease of less than 200 basis points since Q1 2023, showcasing its ability to remain profitable despite production declines [6]. - The company's utilization rate has decreased nearly 20% from its peak to 65%, yet it has managed to sustain higher gross margins compared to historical lows [6]. Strategic Partnerships - A recent deal with Volkswagen positions Onsemi as the primary supplier of power box solutions, which is a positive indicator for future demand, given Volkswagen's status as a top EV seller [7]. Valuation and Analyst Outlook - Onsemi's forward P/E ratio of 18x is 35% below the median of a peer group of 43 large-cap semiconductor companies, suggesting a favorable valuation [8]. - The average price target for Onsemi implies an upside of 18%, with some analysts projecting an upside of 43% [9].