ON Semiconductor: Intelligent Technologies, Greater Future, Robust Development (NASDAQ:ON)

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Though the bears and bulls fight it out so far in 2023, the bullish rally due to the fact the get started of the year continues to trend upward. There is no denying that development stocks are back in vogue as the NASDAQ is up the most of any index with a YTD overall performance of +25%.

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One particular of the stocks top the charge on the NASDAQ index is ON Semiconductor Corp (NASDAQ:ON), aka onsemi. I really feel that ON is a Robust Acquire with substantial earnings development estimated more than the subsequent a number of years due to substantial development in the international EV sector as properly as industrial finish markets which includes decarbonization of the energy grid, intelligent automation, and other megatrends that lead to possibilities for ON to create intelligent energy and sensing systems that address these requires.

From the corporate truth sheet:

onsemi is driving disruptive innovations to assistance create a far better future. With a concentrate on automotive and industrial finish-markets, the business is accelerating alter in megatrends such as automobile electrification and security, sustainable power grids, industrial automation, and 5G and cloud infrastructure. With a extremely differentiated and revolutionary solution portfolio, onsemi creates intelligent energy and sensing technologies that resolve the world’s most complicated challenges and leads the way in generating a safer, cleaner, and smarter planet.

Reporting almost $2B in revenues in Q123, the business is on track to recognize more than $8B in revenues by the finish of 2023 soon after reporting $eight.3B in 2022 and analysts are expecting them to close in on $10B by 2025, primarily based on income revisions and estimates reported on SA.

onsemi site

In the final three months, SA has reported 26 upward EPS revisions and 24 upward income revisions.

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Anticipated EPS development is even additional impressive with estimates additional than doubling in the five-year fiscal period ending Dec. 2023 to Dec. 2027.

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In spite of all this impressive development prospective, the stock trades at a affordable valuation, ever soon after climbing by almost 34% YTD. At the closing price tag of $79.79 on five/24/23, the stock is trading at significantly less than 17 instances forward earnings.

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Who is onsemi and What Do They Make?

As the name implies ON Semiconductor is a designer and manufacturer of energy and sensing semiconductor technologies for automotive, industrial, 5G and Cloud, IOT, healthcare, and aerospace &amp defense markets. The business was founded in 1969 and presently has about 33,000 personnel in 43 Design and style centers and 19 Manufacturing web-sites about the planet.

onsemi

The business is properly aligned with quick-increasing secular trends in automotive and industrial finish markets, which includes the burgeoning international EV sector. Substantial margin expansion is becoming driven by manufacturing consolidation, portfolio optimization and diversification. They have substantial development in free of charge money flow. The business is effectively undergoing a transformation below new leadership, and they are creating exceptional inroads into choose finish markets exactly where they have develop into sector leaders.

For instance, onsemi is an sector leader in SiC (Silicon Carbide) technologies and has forged bargains with EV automakers which includes Tesla (TSLA), VW, Mercedes Benz, and other people.

ON Q123 investor presentation

On May perhaps 16, they announced a deal with Kempower to give EliteSIC MOSFETs and diodes for Kempower electric charging stations.

By incorporating onsemi’s EliteSiC MOSFET technologies, Kempower’s EV charging options will advantage from superior energy, overall performance and reliability. With low ON resistance and minimal gate and output capacitance, EliteSiC energy devices exhibit decrease energy losses at higher operating frequencies, top to elevated method efficiency and lowered finish method size. These benefits translate into greater energy density and higher all round reliability for Kempower’s EV charging options.

The intelligent sensing and intelligent energy technologies that ON delivers drive market place development in the EV and industrial finish markets, with 7 to 9% CAGR estimated among 2021 and 2025.

According to Deloitte Insights, the international EV sector is increasing rapidly primarily based on the share of passenger auto and light duty autos sold every single year, with as considerably as 30% of international market place share anticipated to be created up of EVs by 2030. Most of that market place share will be in China with EVs accounting for almost 50% of market place share by 2030, 42% in Europe and 27% of US sales. The automotive finish market place represents about 50% of the total revenues from ON and the EV automotive market place is increasing swiftly, which is driving innovation in the sector. Auto and Industrial is anticipated to develop to 75% of revenues this year from 60% in 2021.

Deloitte

In the course of the 51st Annual JP Morgan Worldwide Technologies, Media and Communications Conference contact transcript, JPM Analyst Harlan Sur asked this query:

I’d like to – on the monetary targets that you place out final week, ten% to 12% income CAGR, 53% gross margins, 40% operating margins and 25% to 30% free of charge money flow margins. The group has been defocusing away from low gross margin firms, appropriate, more than the previous quantity of years.

The response from Thad Trent, EVP and CFO of onsemi explained their tactic:

If you consider about the improvement actions of exactly where we are to get to that 53%, a massive element of that is mix. And it is two elements of mix. One particular is auto and industrial, as we flex additional there, which we’ve been performing. Final year, we have been roughly 73% auto and industrial. In Q1, we’re 79%. If you quick forward, we’re going to be 85% auto and industrial. But the other element is the mix to this greater-worth solution, proprietary merchandise that drive greater gross margin.

And gross margins have been enhancing significantly more than the previous two years as illustrated in this screen capture from a slide in the Q123 Investor presentation.

ON investor presentation

Other industrial options involve power infrastructure such as solar power inverters, power storage, and EV quick charging options. Other industrial automation options involve connected lighting, safety and surveillance cameras, machine vision, autonomous mobile robots, and industrial motor drives. Computing and communications options involve 5G radio units, server energy options, rack energy supplies, bus protection, core and auxiliary energy, and telecom infrastructure.

A different trend is establishing towards clever buildings that use Artificial Intelligence to incorporate sensors and massive information to manage power usage and emissions as explained in this study paper. This is a different emerging trend that presents extra possibilities for ON to capture market place share.

Mainly because developing power systems increasingly integrate sensors and embedded elements, buildings are becoming complicated networked cyber-physical power systems.

As they illustrate in this slide from the Q123 investor presentation, intelligent energy and sensing go hand in hand to drive innovation and “enormous disruption” in automotive and industrial applications as properly as give possibilities to cross more than into adjacent markets like Cloud and Telecom.

ON investor presentation

I have spoken in earlier articles about the 4th Industrial Revolution and how firms like onsemi are ushering in the disruptive processes and technologies that allow it. By integrating sustainable business enterprise practices that harness converging technologies like AI, intelligent sensors, massive information, and human powered processes that integrate the physical, digital, and biological worlds we can make optimistic advances that allow a future that is far better and additional inclusive for everybody. ON is properly positioned to participate in that revolution and have won a number of awards that recognize the sustainable business enterprise practices and ESG initiatives that they embrace as an organization.

Peers and Competitors

While not genuinely a competitor and only a peer in the sense that they also are in the semiconductor space, Nvidia reported Q1 final results that smashed expectations, stunned investors and provided substantially elevated guidance.

The CEO, Jensen Huang, reiterated his stance that the “iPhone moment” for AI is right here. That report tends to make it clear that the AI revolution (an integral aspect of the 4th Industrial Revolution) is right here to remain and not just a passing fad as some would have you think. Some of the techniques that ON advantages from the AI trend incorporates these final results from a rapid search of the business site:

onsemi site

Other peers in the sector involve Marvell Technologies (MRVL), Globalfoundries (GFS), Microchip, STM, and NXP Semiconductors (NXPI). In the previous 1 year and YTD, ON has outperformed all of them.

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Summary

In the previous five years, the price tag of ON stock has elevated by additional than 200% and I anticipate that it will continue to enhance in worth more than the subsequent five years as automotive revenues and industrial finish market place options continue to develop at a price of about 7-ten% CAGR. Boosted by the megatrends that are occurring as portion of the 4th Industrial Revolution which includes the use of AI to enhance industrial automation, EV adoption, and the renewable power transition, ON stands to get market place share, continue to enhance gross margins and develop EPS.

By 2027 with estimated EPS of more than $ten, the stock could very easily trade for upwards of $200 at a affordable many of 20x earnings. By the finish of 2023, EPS could surpass $five as estimates are revised, with a brief-term price tag target of $one hundred, representing an upside of about 20%s from the existing share price tag of just below $80.

With 29 Wall Street analysts following ON stock, 17 price ON a Robust Acquire, three a Acquire, and 9 Hold ratings.

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My sense is that ON will continue to develop EPS and enhance gross margins as they expand solution offerings and concentrate additional on specialized merchandise that leverage their existing leadership in SiC technologies. I price the stock a Robust Acquire at a price tag beneath $80.