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On Semiconductor Corp. (ON) focuses on designing, manufacturing, and supplying semiconductor components and solutions to various industries, including automotive and electric vehicles (EVs), aerospace and defense, 5G and cloud computing, Internet of Things (IoT), sustainable energy grids, and more. Onsemi, as it also known, operates through the Power Solutions Group (PSG), Advanced Solutions Group (ASG), and Intelligent Sensing Group (ISG) segments.
Why is ON Stock Underperforming?
Valued at $28 billion, the company is headquartered in Scottsdale, Arizona, with global operations. Due to its heavy exposure to the cyclical auto market, which accounted for roughly 48% of revenue last year, ON hasn't exactly delivered the same kind of breakout price action as its artificial intelligence (AI) semiconductor rivals.
ON stock is down 21% on a year-to-date basis, significantly lagging the broader market's gains. The shares have now lost more than 40% from their July 2023 highs.
The chip stock looks cheap now after this bout of underperformance, with Onsemi stock valued at 16.48x forward adjusted earnings - a discount to its tech sector peers, as well as its own five-year historical average of 19.98x.
According to a recent brokerage note from Wells Fargo, the stock's “undemanding” valuation has caught the eye of some high-stakes investors.
Hedge Funds Are Buying ON Stock
In a recent note on semiconductor stocks, Wells Fargo analyst Joe Quatrochi wrote that a popular trade among hedge funds is to go long ON and short NXP Semiconductors (NXPI). Quatrochi explained that hedge fund investors favor Onsemi's low valuations, while NXPI is in the hot seat amid concerns over rising competition from Qualcomm (QCOM).
Overall, said the analyst, “Investors largely agree w/ our view the auto semi trade is in a slightly easier / better position than industrials given [inventory] digestion across both [markets].”
Onsemi Tops Q3 Results
Onsemi posted Q3 earnings results in late October, reporting a profit of $401.7 million, or $0.99 per share on an adjusted basis. That topped analysts' $0.97 per share estimates. Revenue totaled $1.76 billion, down 19.27% YoY, but edging past Wall Street's estimate of $1.75 billion.
"Over the last several quarters, we talked about an L-shaped recovery and as expected, the demand environment remains muted with ongoing inventory digestion and slow end demand," said President and CEO Hassane El-Khoury on the conference call with analysts.
Onsemi guided for Q4 revenue in the range of $1.71 billion to $1.81 billion, just short of the consensus estimate for $1.78 billion. Adjusted earnings per share are expected between $0.92 and $1.04, with the midpoint of that range again coming up short against Wall Street's $1.00 forecast.
How Do Analysts Rate ON Stock?
Wall Street is optimistic on Onsemi stock overall, with an average rating of “Moderate Buy” among the 31 analysts in coverage. The stock currently has 17 “Strong Buys,” up from 15 a month ago.
The mean price target for ON stock is $86.82, indicating expected upside potential of about 32% from Thursday's closing levels.
