The Undervalued Powerplay: Why ON Semiconductor is a Strategic Buy for 2026

In the dynamic landscape of power and sensing technologies, ON Semiconductor (ON) stands out as a compelling investment opportunity for 2026. Despite a challenging 2025 marked by a 92% decline in net income to €120 million due to cyclical demand pressures, the company's strategic positioning in high-growth sectors-electric vehicles (EVs), AI infrastructure, and U.S. onshoring-combined with a $6 billion share buyback program, paints a picture of undervaluation and long-term capital-efficient growth.

Capital-Efficient Growth in High-Margin Sectors

ON Semiconductor's pivot toward high-margin applications is a cornerstone of its value proposition. The company is aggressively investing in silicon carbide (SiC) and gallium nitride (GaN) technologies, which are critical for EV power management and AI data centers. These advanced materials enable higher efficiency in power conversion, a key requirement for next-generation EVs and energy-intensive AI workloads. For instance, ON's acquisition of Qorvo's SiC JFET technology and Vcore Power Technologies has bolstered its capabilities in these areas, aligning with the global semiconductor market's projected $800 billion valuation in 2025 driven by AI infrastructure.

The U.S. onshoring trend further amplifies ON's strategic advantage. The CHIPS and Science Act, with its $52 billion in manufacturing grants and 25% investment tax credits, is accelerating domestic production. ON, like peers, is leveraging these incentives to reduce reliance on foreign supply chains and capitalize on the U.S. government's push to triple domestic semiconductor capacity by 2032. This not only mitigates geopolitical risks but also positions ON to benefit from the $6 billion in private-sector investments flowing into states like Arizona and New York.

Margin Expansion and Buyback-Driven EPS Growth

While ON's net profit margin contracted to 7.3% in July 2025 due to a $634.2 million one-off loss, the company's underlying margins remain robust. The third quarter of 2025 saw a non-GAAP operating margin of 19.2%, and analysts project a rebound to 25.6% within three years. This improvement is underpinned by cost discipline, including non-cash impairment charges to reduce recurring expenses, and the $6 billion buyback program announced in late 2025.

The buyback, set to run through 2028, is a bold statement of management's confidence in ON's long-term value. By repurchasing shares equivalent to nearly its free cash flow ($925 million year-to-date), the company aims to boost earnings per share (EPS) through share count reduction. This strategy is particularly potent in a sector where ON's price-to-earnings (P/E) ratio of 71.4–74.6 far exceeds the peer average of 34.1x, suggesting that the market is pricing in significant future growth.

Favorable Valuation Amid Sector Premiums

ON's valuation metrics highlight its undervaluation relative to peers. While the broader Information Technology sector trades at a P/S ratio of 39.17, ON's P/S ratio is lower, reflecting its focus on capital-efficient power technologies. Similarly, the Power sector's average P/B ratio of 2.07 pales in comparison to ON's elevated P/E, which analysts attribute to its growth potential in EVs and AI.

Critics may argue that ON's 2025 downturn justifies its current valuation, but the projected sevenfold net income recovery-driven by AI and EV demand-suggests that the market is underestimating its resilience. The $6 billion buyback further enhances this narrative, as it signals a commitment to returning capital to shareholders during a period of sector-wide volatility.

Conclusion: A Strategic Buy for 2026

ON Semiconductor's combination of margin expansion, strategic acquisitions, and a disciplined buyback program positions it as a strategic buy for 2026. While the company faces near-term headwinds in automotive and industrial markets, its long-term trajectory is bolstered by the $800 billion AI infrastructure boom, U.S. onshoring tailwinds, and a management team focused on capital efficiency. For investors seeking exposure to high-margin power technologies at a discount to future potential, ON offers a compelling case.