Expanding EV And AI Markets In China Will Unlock Value

Key Takeaways

• Expanding automotive and AI partnerships, plus investments in silicon carbide and power solutions, position ON Semiconductor for sustained growth and improved margins in structural markets.
  
• Portfolio streamlining and manufacturing efficiency initiatives are expected to boost profitability and cash flow through a better product mix and operational leverage.
  
• High exposure to cyclical markets, manufacturing underutilization, and competitive and geopolitical risks threaten revenue growth and margin improvement despite attempts to shift business mix.

Catalysts

Provides intelligent sensing and power solutions in Hong Kong, Singapore, the United Kingdom, the United States, and internationally.

• ON Semiconductor's expanding partnerships and design wins in EV platforms (notably in China) and its increased penetration into next-generation automotive and hybrid vehicle systems position the company to capitalize on the accelerating shift to electrified and autonomous transportation-these tailwinds are likely to drive higher recurring revenues and improved top-line growth.
  
• The company's strategic investments in silicon carbide (SiC), wide bandgap technologies, and advanced power management solutions for both automotive and AI data centers position it at the forefront of key structural growth markets; as these high-value products ramp, they are expected to enhance margins and drive long-term earnings growth.
  
• Ongoing portfolio rationalization-phasing out legacy and non-core products, and reallocating resources towards higher-margin, differentiated offerings (such as ADAS image sensing and machine vision)-should improve product mix and boost average margins, positively impacting net profitability and earnings leverage.
  
• Structural improvements in manufacturing efficiency, including the Fab Right initiative and selective capacity reduction, are lowering operational costs and setting up significant margin expansion as utilization rates recover with end-market demand-this operational leverage is likely to drive higher net margins and cash flow conversion as the cycle turns.
  
• Rapid secular growth in AI data center infrastructure, coupled with ON's unique position as a US-based provider of intelligent power semiconductors, is generating strong early revenue momentum-ongoing adoption of power-dense, energy-efficient solutions is expected to support sustained revenue increases and potential long-term operating margin expansion.

ON Semiconductor Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming ON Semiconductor's revenue will grow by 11.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.5% today to 27.2% in 3 years time.
• Analysts expect earnings to reach $2.3 billion (and earnings per share of $6.43) by about July 2029, up from $573.7 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $2.8 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 23.8x on those 2029 earnings, down from 58.8x today. This future PE is lower than the current PE for the US Semiconductor industry at 57.6x.
• Analysts expect the number of shares outstanding to decline by 4.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.46%, as per the Simply Wall St company report.

Risks

• The company's automotive segment, a major revenue source, is highly exposed to regional weakness (notably in North America and Europe) and slow EV ramp rates outside China, making ON Semiconductor vulnerable to cyclical economic downturns and creating uncertainty for revenue and margin growth prospects.
  
• Persistent underutilization of manufacturing capacity, with utilization only in the high-60% range despite portfolio reductions, continues to weigh heavily on gross margins, and gross margin improvement is largely predicated on a cyclical recovery and increased demand-events which are uncertain and may not materialize as quickly or strongly as hoped.
  
• ON Semiconductor's aggressive exit from lower-margin "legacy" and non-core businesses (~$200M-$300M in revenue between 2025 and 2026), while intended to improve mix, creates a near-term revenue headwind and risks failing to offset with sufficient growth from newer segments (AI data center, Treo, advanced SiC) if customer adoption or market ramp is slower than anticipated.
  
• The company faces intensifying price and technology competition, especially in image sensing and EV silicon carbide markets, plus potential ASP erosion from competitors and local Chinese players, which could compress future gross and operating margins despite current differentiation.
  
• Geopolitical and supply chain risks-including US-China tariff volatility, exposure to China as a growth engine, and Section 232/301 shifts-could disrupt ON's access to markets or low-cost manufacturing, raising costs, limiting global revenue opportunities, or restricting margin expansion.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $113.52 for ON Semiconductor based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $150.0, and the most bearish reporting a price target of just $85.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $8.4 billion, earnings will come to $2.3 billion, and it would be trading on a PE ratio of 23.8x, assuming you use a discount rate of 11.5%.
• Given the current share price of $86.7, the analyst price target of $113.52 is 23.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.