ON Semiconductors, Another Reason To GET Bullish On Microchips

ON Semiconductor Is About To Set A New High

ON Semiconductors (NASDAQ: ON) has given another confirmation of what we already knew to be true about the semiconductor industry. Global systemic demand for microchips has sparked a secular upcycle in the microchip industry.  ON Semiconductor’s exposure to the OEM auto market and computer vision/automation industry make it a top pick in the sector. Its position as a US-based manufacturer makes it an easy buy-in light of mounting tensions between the US and China. 

While ON Semiconductors has yet to initiate a dividend, the company is growing by double digits, has a strong balance sheet, and is producing record amounts of free cash flow with a positive forward outlook. Based on the results from this company and others within the industry, we expect to see growth to continue in the back half of the year and for it to exceed the analyst consensus. 

“We continue to see accelerating demand for our products in our strategic automotive and industrial end-markets. As we continue to drive operational efficiencies in our manufacturing sites, we expect to see incremental supply and revenue growth in the second half of 2021.”

On Semiconductors Had A Record-Setting Quarter

Structural changes within the business and the global systemic demand for microchips drove ON Semiconductors Q2 Revenue to a record high. The $1.67 billion in net consolidated revenue is up 38% from last year but that is versus a relatively easy comp. Revenue in last year's second quarter fell nearly 10% but that loss has been more than made up, the Q2 revenue is up 13% sequentially and 23% over the past two years proving the company's strategy and positioning are working. The company reports strength in both the OEM and Industrial end markets as well as double-digit revenue increases in all three operating segments.

Moving down the report, the results get even more interesting. The company reported a significant improvement in the adjusted gross margin which drove record earnings on the bottom line. The adjusted gross margin widened by 310 basis points sequentially and 750 bps year-over-year to 38.4% beating the consensus estimates by a full 200 basis points. This drove record earnings as well as record free cash flow and led the company to guide Q3 expectations higher. On the bottom line, the GAAP $0.42 beat by $0.07 while the adjusted $0.63 beat by $0.14.

Looking forward, the company is expecting revenue strength to continue into the third quarter and is looking for flat to 5.3% sequential growth at the high end of the range. This amounts to roughly 26% YoY growth at the low end of the range and is compounded by positive margin guidance as well. The company is expecting third-quarter margins to improve another 100 basis points or more and deliver another record quarter for adjusted earnings. It's our belief the company will come in at the high end of the guidance range if not surpass it.

The Technical Outlook: ON Semiconductors Is On Break Out Alert

Shares of ON Semiconductor are up nearly 10% in the pre-market action driven by solid earnings and a positive outlook. The move has price action very close to setting an all-time high that, if set, will confirm a secular uptrend. Looking at the monthly chart, we see a very strong bullish flag on the verge of breaking out to a new high. If this high is set, it will bring price targets in the range of $60 into play which would be worth roughly 50% of upside from current levels. Considering that most industry professionals see the microchip shortage lingering well into 2022 we think the bull market in this stock and this market has quite a ways to run.