ON Semiconductor (ON) is focused mainly on growth areas within the automotive and industrial markets. The company posted its strongest top-line expansion since 2017 last year and ON Semiconductor provided upbeat guidance when it beat our fourth quarter estimates in February. Some of ON Semiconductor’s other fundamentals also help make the stock an enticing buy right now.

ON Basics

ON Semiconductor is one of the top semiconductor manufacturers with over 80,000 different parts that serve tens of thousands of customers across countless markets. ON, which was originally a spin-off of Motorola in the late 1990s, is focused on leading in the intelligent power and sensing technologies areas of the chip space, with a core focus on automotive and industrial end-markets right now.

ON Semiconductor’s intelligent power and sensing technologies aim to help accelerate secular innovations such as electric vehicles, connected vehicle tech, industrial automation, sustainable energy grids, cloud infrastructure, and beyond.

To help give a sense of where its revenue is coming from, ON Semiconductor’s automotive sector accounted for 33% of sales in Q2 FY21 (last time it provided this type of breakdown), with Industrial/Aero-Defense/Medical grabbing 26%. Meanwhile, Communications and Computing made up 15% each and its Consumer segment brought in 10%. 

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ON Semiconductor’s adjusted fiscal 2021 earnings soared 250% on the back of 28% higher revenue that saw it pull in $6.7 billion. More specifically, its automotive segment climbed 36% and its industrial revenue increased 33%, with the growth driven by “automation, electrification, and advanced safety.”

ON Semiconductor is also focused on boosting its margins and continuing to exit “low-margin noncore products.” The firm’s gross margin surged from 32.7% in FY20 to 40.3% last year. Plus, its free cash flow soared 167% YoY.

The company in November completed its purchase of GT Advanced Technologies. The firm is a key supplier of silicon carbide, a crucial component needed to manufacture electric vehicles, high-power industrial motors, chargers, and beyond. ON Semiconductor said on its earnings call that it expects its silicon carbide revenue to more than double in 2022.

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Outlook

ON Semiconductor topped our fourth quarter earnings estimate by 16%, to bring its average beat to 21% in the trailing three periods. The company also provided strong upbeat EPS guidance despite global supply chain setbacks. ON’s adjusted FY22 consensus EPS estimate has popped 27% since its Q4 release on February 7, with its 2023 estimate 37% higher. This bottom-line positivity also showed up for its current quarter and Q2 outlooks.

Zacks estimates call for ON Semiconductor’s FY22 earnings to climb 41% to $4.16 a share, which would come on top of last year’s massive jump. The firm’s 2023 EPS is then set to pop 7% higher. Meanwhile, its revenue is projected to climb 14% in 2022 to $7.66 billion and another 5% in 2023.

Other Fundamentals

ON Semiconductor stock more than double the broader Zacks Technology Sector over the last 10 years, with it up 575%. This includes a big run off the covid lows, with ON having surged 615% in the past two years vs. its industry’s 168% and tech’s 90%. More recently, ON has managed to climb 26% during the last six months, while its peers moved sideways and the Zacks Tech Sector has dropped 14%.

Luckily for investors who might have missed out, ON Semiconductor has dropped 15% from its early January peaks of over $71 a share to hover around $60 at the moment. The stock’s current Zacks consensus price target also marks 14% upside to its current levels.   

Its industry and tech-topping run looks even better when diving into ON Semiconductor’s valuation. ON trades at 14.3X forward 12-month earnings. This comes in near its five-year median of 13.4X and below where it was in early 2020 and parts of 2018. ON also trades at a 22% discount to its industry at the moment and 50% beneath its own highs during this stretch.

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Bottom Line

ON Semiconductor’s bottom-line revisions activity helps it land a Zacks Rank #1 (Strong Buy) right now. The stock also grabs an “A” grade for Growth in our Style Scores system and its Semiconductor - Analog and Mixed industry sits in the top 7% of over 250 Zacks industries right now.

Wall Street is high on the stock, with 14 of the 20 brokerage recommendations Zacks has coming in at “Strong Buys.” ON Semiconductor might not be the splashiest name in the chip space, but it’s poised to grow by supplying key components to growth markets that are just getting started, including electric vehicles, advanced driver-assistance systems, new-age energy infrastructure, and beyond.