onsemi: The Rebound is ON for This Chip Stock

Key Points

• onsemi had a tepid quarter, but it was better than expected, and it may experience a solid rebound in its share price.
• The technicals favor a rebound; the question is if this is a relief rally or sustainable.
• Analysts see about a 40% upside for this stock. 

onsemi’s NASDAQ: ON stock price corrected significantly over the last year, setting up today's opportunity. Today's opportunity is a rebound in an oversold name with a solid outlook for long-term growth. The chart action confirms support; the analysts are leading the market, and the Q1 results are better than expected, so this rebound could have legs. 

The company faces headwinds in 2024, but Q1 results indicate that conditions are better than feared, and a pivot back to growth is expected at the end of the year. onsemi’s end-markets are normalizing, and AI is driving the long-term outlook: onsemi isn’t an AI juggernaut but well-positioned to benefit from the demands higher-computing power will put on the entire tech ecosystem. Its power-control, analog, and intelligent sensing devices are well-suited for the demands of industrial, automotive, and IoT end markets. 

onsemi Q1 is Better-Than-Expected 

onsemi didn’t have a robust Q1, with a revenue contraction of 5.1%, but the $1.86 billion is 50 bps better than the analysts' consensus reported by Marketbeat.com, and guidance is the same. Strength was seen in the core PSG or power control segment, up 2%, offset by a 6% decline in AMG (analog) and an 18% contraction in ISG or intelligent sensing. PSG is the largest segment by far, and 47% of the revenue. 

The margin news is another better-than-expected result. The GAAP and adjusted GAAP and operating margins contracted compared to last year but were less than expected. The outperformance helped to leverage the top-line strength and delivered $1.08 in adjusted earnings. The adjusted earnings are down 9.25% YOY but 285 bps ahead of expectations, with similar strength in the guidance. The guidance isn’t robust, forecasting a 17% contraction, but it is ahead of consensus and opens the door to improving sentiment. The long-term outlook is hazy, but analysts expect growth to resume in Q1 2025. 

onsemi is a Buy for Capital returns

It doesn’t matter that onsemi doesn’t pay dividends because it repurchases shares. The company used 100% of free cash flow to repurchase shares on a trailing twelve-month basis and will likely continue to do so in 2024 and beyond. Repurchases reduced the count by 2.6% diluted compared to last year, significantly improving shareholder value. 

Shareholder value and repurchasing power are also seen in the balance sheet, which includes a steady cash position, increased current and total assets, decreased liabilities, and a 25% increase in shareholder equity at the end of the quarter. There is some leverage, but it is low at 0.3% of equity, so no red flags are present. 

The trend in analyst sentiment ahead of the report suggests a bottom in the market. Analysts trimmed their targets slightly since the last report but the consensus figure remains up compared to last year, about 1000 basis points, and forecasts a 38% upside for the stock. A move up to the consensus target would confirm a complete reversal in the market and may lead to a new all-time high. 

The Technical Outlook for onsemi is Favorable

The technical outlook for onsemi is favorable because the market shows a bottom coincident with better-than-expected news, and the indicators are highly divergent. Divergence in MACD suggests a growing strength in the market despite the latest lows. This situation will likely lead to a relief rally if not a sustained rebound. The critical resistance targets are near $76 and $85. A move above $85 is the trigger point for a complete reversal that may lead to a sustained rally and a new all-time high.