Onsemi Stock Hits Bottom; Rebound in the Works

Key Points

• Onsemi hit bottom early this spring and is on track to rebound later this year.
• The company is on the cusp of a pivot that should lead to growth and accelerated earnings in 2025. 
• Recent activity by analysts suggests that a headwind has dissipated, and a tailwind is beginning to blow. 

Onsemi NASDAQ: ON share price struggles in 2024, but the bottom is in, and a rebound is at hand. While sales will decline in 2024, the cause is macro, including end-market inventory, and an end to the pain is near. Analysts forecast a bottom in Onsemi end semiconductor markets, suggesting a pivot is coming for the business. That is expected by the end of the year and will be a catalyst for higher share prices. Until then, investors can count on solid free cash flow and share repurchases to support the share price. 

Onsemi's business shift has helped it sustain its margin. While revenue contracts, gross margin is stable, and operating expenses are falling, leaving the cash flow relatively unaffected. Cash and free cash flow are down compared to last year but by a slim amount, allowing for robust capital return while maintaining a healthy balance sheet. The company reduced the share count by 2.6% in Q1, and share repurchases will continue because margin and cash flow are expected to remain strong. 

Analysts Stand By Undervalued Onsemi

The Q1 release caused numerous analysts to lower their price targets for Onsemi stock, creating a headwind for the market. The caveat is that the headwind was short-lived, sentiment is still firm at Buy, and the market winds are already shifting back in favor of investors. 

The latest update is from Wells Fargo. The firm put the stock on its list of top tactical ideas for the second half with a $95 price target. In their view, the company is at an inflection point and will soon return to revenue and earnings growth. In addition, Wells Fargo analysts think the valuation is compelling relative to peers, which have outperformed this year, and the long-term outlook for earnings. 

With an expectation that the company will eventually achieve $10 per share in earnings, it is deeply undervalued and set up to experience a price-multiple expansion, provided a market catalyst emerges. The $10 target puts the stock at only 7x its earnings potential compared to 17x this year’s outlook, which is a deep value. There is a potential catalyst in the Q2 earnings results. Analysts have lowered the bar significantly for Q2 and set Onsemi up to outperform. 

How high can Onsemi go this year? Based on the consensus, about 25%. Wells Fargo and other recent analyst reports are leading the market even higher. 

Onsemi Expands SiC Footprint in the EU

A planned investment in the Czech Republic is among the drivers for Onsemi's growth and stock price. The company plans to spend up to $2 billion on a new silicon carbide or SiC chip manufacturing plant. The plant would be the 2nd facility in the Czech Republic and goes hand in hand with the EU’s desire to renationalize its semiconductor industry. 

Silicon carbide chips are becoming increasingly important because of their resistance to heat and mechanical decay and greater efficiency. The EV and solar cell markets use them intensively for power control applications. Among the other avenues of growth for SiC is in data centers, where AI workloads generate unprecedented amounts of power consumption. 

Institutional activity in Onsemi stock is mixed this year but coincides with the market bottom. Institutional activity was net bearish in Q1 but turned bullish in Q2 when the price action reached an eighteen-month low. Today, the market is showing support at a critical moving average that could push the stock price back above $75. In this scenario, the market for ON stock will confirm a trend change to sideways from down and set itself up to move higher later in the year.