ON Semiconductor: Short-Term Pain For Long-Term Gain

Core Viewpoint - Onsemi is currently experiencing a decline in share price due to negative sentiment in the automotive and industrial sectors, but the long-term potential remains strong, particularly for FY25 and beyond, warranting a buy rating despite short-term concerns [3][12]. Financial Performance - The company's revenues have decreased by approximately 4% to 5% over the last year, which is considered manageable given the downturn in the automotive and industrial sectors [4]. - Margins have also been affected, with utilization rates dropping to around 65% in the most recent quarter, but management notes that gross margin expansions are ongoing despite this decline [6]. - The company's cash position is robust at approximately $2.6 billion against $2.5 billion in long-term debt, with interest expenses significantly reduced from $26.4 million to $16 million year-over-year [7]. Market Outlook - Analysts have been overly focused on the current downturn, failing to consider the long-term recovery potential as demand for products is expected to strengthen, particularly in the automotive sector with the rise of Hybrid Electric Vehicles (HEVs) [8]. - HEV sales saw a 59.5% year-over-year increase in February 2024, while Battery Electric Vehicles (BEVs) are projected to grow by 16.2% year-over-year in 2024 [8]. - The industrial sector shows signs of stabilization, although management is cautious about declaring a bottom just yet [8]. Valuation Insights - A forecasted revenue decrease of around 12.5% for FY24 is expected, followed by a rebound with a projected 10% compound annual growth rate (CAGR) over the next decade [9]. - Gross margins are anticipated to improve, reaching 51% by FY27, with potential for further increases as utilization rates normalize [10]. - The intrinsic value of Onsemi is estimated at around $74 per share, indicating it is currently trading at a slight discount [10].