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Semiconductor stocks have been a dominant force in the market in recent years, with juggernauts like NVIDIA (Nasdaq: NVDA), Broadcom (Nasdaq: AVGO), and ARM Holdings (Nasdaq: ARM) generating massive returns.

ON Semiconductor (Nasdaq: ON) has not been one of those high fliers, but there is good reason to think that it will outperform its competitors over the next 12 months.

Here’s why ON Semiconductor is a top stock to buy in October.

Hurt by decline in new car sales  

While semiconductor stocks have been strong in general, they are not a monolith, and some have downright struggled during this AI boom. ON Semiconductor would be one of those that have struggled, as its stock price has slipped 16% year-to-date and is off nearly 23% over the past 12 months.

Compare that to NVIDIA, for example, which is up 167% YTD and 188% over the past year, or Broadcom, which has surged 60% YTD and 112% over the past year.

A primary reason is that Onsemi, as the company refers to itself, specializes in sensors and chips for cars and silicon carbide chips for EVs, as well as chips in the industrial sector. These two areas make up about 80% of Onsemi’s revenue and both have down in recent years, particularly the auto industry, as high interest rates have curtailed new car buying. In 2024, new car sales are down about 4% through the first three quarters, compared to the same period a year ago.

That has resulted in revenue declining about 15% in the most recent quarter and 11% through the first six months. Automotive segment revenue, specifically, declined about 11% last quarter. Net income dropped 41% in Q2 to $338 million, and 24% through the first six months of the year.

Some bright spots ahead

With its falling stock price, Onsemi’s valuation has also plummeted, as the stock is trading at just 16 times earnings, down from 21 year ago, and 14 times forward earnings.

Most Wall Street analysts that cover the stock consider it a buy, with a median price target of roughly $90 per share, which would be a 28% increase over the current price.

There are several reasons why analysts are bullish on Onsemi. The primary reason is that interest rates have already started falling and will continue to do so, which should spur new car sales in 2025.

The lower interest rates, combined with dealer incentives and lower prices, are expected to increase new car sales in 2025, as the industry begins to normalize, and consumers shift from buying used cars to new cars.

In addition, the massive new stimulus package in China should benefit chipmakers, as China consumes about half of the world’s semiconductors chips, including those in the energy and automotive sectors.

Can it outperform?

Onsemi is expected to report third quarter earnings in late October, although no date has been set yet. It projects Q3 revenue somewhere between $1.7 billion and $1.8 billion, which would be up from Q2 at the midpoint.

Also, operating expenses are anticipated to be $329 million to $344 million, which is considerably lower than the $396 billion spent in Q2. That should result in higher earnings, as the company is targeting earnings per share of 85 cents to 97 cents, up from 78 cents per share in Q2.

ON Semiconductor stock should get a boost post-earnings, if it meets of exceeds its targets, and that momentum should carry forward as the Fed is expected to lower rates again in November and December.

With these catalysts, and its cheap valuation, ON Semiconductor stock could be a winner over the next 12 months or so, perhaps even beating some of its more popular rivals.

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