onsemi Puts A Bottom in Chip Stocks, Heads For New Highs

Key Points

• onsemi had a better-than-expected quarter and is moving higher on solid guidance. 
• Its position in the market has been set up to outperform the sector in 2023. 
• Capital returns are on track to continue and will help support the stock this year. 

onsemi NASDAQ: ON has again proven that its refocus on automotive and industrial use cases was the right move at the right move. The Q1 results echo the news from Texas Instruments NASDAQ: TXN, which reported declining sales in all its end markets except for automotive, where onsemi shines. The company’s automotive-oriented revenue grew by 38% in Q1 and equaled 50% of revenue. The shift drives that strength to EVs and self-driving vehicles, which will drive demand for years.

The takeaways for investors include onsemi’s position within the market and its ability to produce growth where others can not. This means that onsemi will lead the group and outperform the SOXX index in 2023. 

“We continued our momentum with first quarter results exceeding expectations despite macroeconomic uncertainties … As secular tailwinds propel our business, we are prudently managing our operations to deliver consistent and predictable results in the current market environment,” said Hassane El-Khoury, President and CEO of onsemi.

onsemi Confirms Support On Results, Outlook 

onsemi had a much better quarter than Texas Instruments and produced revenue of $1.96 billion for a growth of 1.% compared to last year. The revenue beat the Marketbeat.com consensus by 150 basis points on strength in the Automotive and Industrial markets. Automotive and Industrial use accounts for 79% of the net revenue and is underpinning the company’s success. On a segment basis, Advance Solutions Group was the only one to decline and fell -14% compared to last year. The Power Solutions Group grew by 3%, led by the Intelligent Solutions Group’s 32% growth.    

The company reported margin contraction at all levels, but the news is better than feared. The gross margin contracted by 240 basis points and the operating margin by 450, but the GAAP and adjusted EPS were above consensus. The adjusted $1.19 in EPS is down $0.03 compared to last year and the top line growth but outpaced the consensus by $0.11 or more than 1000 basis points and led to an increase in guidance. 

The company raised revenue and earnings guidance for Q2. The company expects revenue and earnings in a range well above the consensus figures, which should result in upward revisions from analysts. Based on the Q1 strength and Q2 guidance, analysts will likely raise targets for the current quarter and the year. That may also result in favorable activity regarding sentiment or share price targets. As it is, 26 analysts rate onsemi a Moderate Buy with a price target nearly 20% above the post-release action. The price target hasn’t budged since the Q1 results were released, but it was trending higher ahead of it. That is likely to continue. 

onsemi Returns Capital To Shareholders 

onsemi uses share-based compensation to pay employees, but the pace of issuance is well below the pace of repurchases. Repurchases are up compared to last year and last quarter and outpace issuance by nearly 4-to-1, benefiting investors. The $76.3 million in net repurchases in Q1 is worth about 0.25% of the share count and can be expected to continue in 2023.   

Shares of onsemi are up more than 6% on the Q1 news and guidance raise. The move confirms the bounce from the $70 support level that began last week and could continue higher. The $80 and $85 levels are likely targets for resistance, but a move up to the $90 to $100 range looks likely if the stock can get above them. That would be a new all-time high.