This Semiconductor Stock Is ON Track for a New High

Key Points

• Onsemi struggled in Q2, but results are better than feared, and guidance is favorable. 
• Cash flow is strong, allowing the company to maintain a fortress balance sheet while buying back significant amounts of stock.
• Analysts are raising their price targets and see this stock hitting a one-year high soon. 

Onsemi’s NASDAQ: ON Q2 results were no blowout. Still, its operational quality and outlook for success have the stock price in rebound mode, and the market is on track to hit a one-year high soon. The critical details are that the business contraction is less than feared, cash flow remains robust, and a return to growth is expected. The return to growth will be driven by inventory normalization in key markets and ramping activity among the major automobile OEMs. Major automobile OEMs are pushing hard to electrify their operations and fleets, and that effort relies heavily on Onsemi’s industry-leading SiC semiconductor technology. 

Onsemi Has Better-Than-Feared Quarter: Analysts Raise Price Targets

Onsemi struggled in Q2, with sluggish demand and inventory issues plaguing the business. However, the 17.2% revenue contraction was less than expected and offset by optimistic commentary from management. Management remains committed to growing market share and building leverage in preparation for demand growth expected to resume in 2025. Demand growth will be centered on SiC-based chips, which are needed for high-power switching solutions and industrial applications. All segments contracted, led by a 22% decline in ISG offset by smaller 18% and 15% declines in PSG and AMG segments. 

Margin news is mixed. The company’s margin contracted at the gross and operating levels on a GAAP and adjusted basis but less than expected. The takeaway is that adjusted earnings contracted accelerated compared to revenue but outpaced the consensus by 500 basis points. The salient detail is that cash flow remains solid, leaving the balance sheet in fortress conditions despite robust capital returns. Onsemi targets a 100% FCF payout ratio and spends entirely on share repurchases. Over the last 12 months, repurchases have reduced the count by an average of 3.45% for Q2 and are expected to continue.

Onsemi's guidance was better than expected due to numerous downward revisions leading into the report. The company expects business to be flat compared to Q2, down about 20% YoY, aligning with the consensus but well above the most recent revisions. Earnings guidance is also favorable, aligning with the consensus estimate and leading numerous analysts to raise their stock price targets. MarketBeat is tracking about a dozen revisions issued immediately after the earnings release; all include an increased stock price target, leading the market to the $88 level. 

Onsemi Capital Return is Safely Driving Value for Investors

The balance sheet is a fortress. Highlights from Q2 include a flat cash position, increased current and total assets offset by flat debt, and reduced liabilities. The net result is a 2.6% sequential improvement in shareholder equity that brings the gain to 7% on a YTD basis and 19% compared to last year. Debt is present but ultra-low; total liabilities are about 0.6x equity, while debt is about 1x the cash, leaving the business in a nimble position to reinvest as needed, make acquisitions if targets arise, and continue buying back stock. 

Onsemi’s price advanced following the release, removing a resistance target and opening the door to a larger advance. The market shows signs of resistance at the two-week high, but it may not last because it is on the brink of a significant shift. That shift is marked by the cluster of moving averages providing support. 

The EMAs are set up to fire a strong Golden Crossover, a bullish signal that may increase volume and momentum over the next few weeks. The market could easily reach the consensus $88 price target in this scenario. If not, and the Golden Crossover fails, Onsemi stock will likely remain range-bound at current levels until better indications of growth are present.