ON Semiconductor’s Transformation: Analyst Predicts Surge in Earnings and Gross Margin Expansion

Introduction:

ON Semiconductor’s Shifting Landscape  Unveiling the Transition  ON Semiconductor, once primarily recognized as a supplier, is undergoing a profound metamorphosis. Analysts foresee a remarkable upturn in earnings and a substantial expansion of gross margins. Recently, during an investor call with Thad Trent, ON’s CFO, the analyst gained insights into the ongoing transition and the business’s sweeping structural changes implemented over the past two years.

Unraveling the Growth Potential

Within the intricate realm of semiconductors, ON Semiconductor stands out as one of the most compelling growth stories. Its tremendous earnings power, coupled with an already demonstrated potential, positions it as an industry frontrunner. The management’s execution prowess has been the driving force behind the company’s success, and the analyst firmly believes that this momentum will persist. By strategically repositioning itself, ON Semiconductor has solidified its dominance in the Auto and Industrial end markets.

Seizing Opportunities in SiC and Beyond

The progress in Silicon Carbide (SiC) ramp and the escalating enthusiasm among customers serve as clear indications of ON Semiconductor’s bright future. With LTSAs (Long-Term Supply Agreements) surpassing $11 billion, the company has established its foothold as the preferred supplier in the SiC space. Despite a relatively softer macro environment for SiC and silicon, customers are motivated to secure their supply chains in response to the accelerating transition towards Electric Vehicle (EV) architecture. Automotive applications drive nearly 90% of SiC LTSAs, with the remaining 10% attributed to the Industrial sector. Recent announcements have only strengthened the company’s standing, cementing its potential as a leading player.

Charting the Path to Greater Margins

The analyst envisions a clear trajectory toward achieving a mid-term gross margin of 55% or higher. As SiC scales up and gains more prominence in the product mix, further expansion becomes inevitable. Based on conservative assumptions, the analyst estimates earnings exceeding $10 by FY27. However, if gross and operating margins continue to perform well, that figure could surpass $11, indicating the immense growth potential that lies ahead.

Riding the Secular Tailwinds

The Auto and Industrial sectors provide a solid foundation for ON Semiconductor’s growth. The secular tailwinds driving these industries have proven to be resilient, offering an extended runway of opportunities for ON Semiconductor. Armed with a robust portfolio, the company aims to capture a more substantial market share, transitioning from a mere supplier to a comprehensive solutions provider and trusted partner.

ON Semiconductor’s Market Performance As of the latest update on Tuesday, ON Semiconductor shares are currently trading lower by 1.76% at $88.56.