Onsemi's Erosion in Automotive Sales and Macroeconomic Uncertainty: Is the S&P 500's Worst-Performing Stock a Buy?

The semiconductor industry, once a beacon of resilience amid global economic turbulence, now faces a pivotal test. For ON Semiconductor (ON), a company long positioned as a leader in automotive and industrial chips, the past year has been a stark reminder of the fragility of market leadership. With a year-to-date decline of 22.22% and a 27.83% drop over the past 12 months, ON's stock has underperformed the S&P 500, which has gained 7.43% YTD. This erosion has sparked debate: Is the selloff a contrarian opportunity, or a signal of deeper structural challenges?

The Automotive Dilemma: Revenue Declines and Margin Pressure

ON's automotive segments—Power Solutions Group (PSG), Analog and Mixed-Signal Group (AMG), and Intelligent Sensing Group (ISG)—accounted for 52% of its total revenue in 2023. However, 2024 revealed a stark shift: PSG revenue fell 16% YoY to $698.2 million, AMG dropped 14% to $555.9 million, and ISG declined 15% to $214.6 million. The adjusted gross margin contracted 770 basis points to 37.6%, while operating margin fell 1,020 basis points to 17.3%. These figures underscore a sector grappling with pricing pressures, oversupply, and weaker demand for EVs.

The root of the problem lies in macroeconomic headwinds. Inflation and high interest rates have dampened EV adoption, with automakers delaying production plans and cutting costs. ON's CEO, Hassane El-Khoury, acknowledges “early signs of stabilization” but notes that recovery is slower than anticipated. The expiration of the $7,500 U.S. federal EV tax credit and geopolitical supply chain disruptions have further compounded the issue.

Strategic Resilience: Innovation and Partnerships

Despite these challenges, ON is not without strengths. The company's silicon carbide (SiC) business, critical for extending EV range, grew fourfold in 2023 and is now a key differentiator. Its partnership with Xiaomi on 800V EV drive platforms signals a strategic pivot toward high-margin, next-generation technologies. Additionally, ON's free cash flow generation—$1.2 billion in 2024—has allowed it to return 54% of cash to shareholders via buybacks, bolstering confidence in management's capital allocation discipline.

The company's Zacks Rank #2 (Buy) rating suggests optimism about its ability to outperform the S&P 500 in the near term. Yet, this optimism must be tempered by the reality of a competitive landscape. Infineon Technologies, STMicroelectronics, and Texas Instruments collectively dominate 40% of the automotive semiconductor market, with Infineon alone capturing 29% of the microcontroller segment. ON's 52% automotive revenue share in 2023 is impressive, but it must defend this position against rivals with deeper R&D budgets and broader product portfolios.

Macroeconomic Risks and the Path Forward

The broader economic environment remains a wildcard. While the semiconductor industry is projected to grow 7.5% CAGR through 2030, driven by AI and data center demand, automotive growth is expected to lag. Inflationary pressures on raw materials and logistics, coupled with U.S.-China trade tensions, could prolong margin compression. However, ON's focus on advanced packaging technologies (e.g., TSMC's CoWoS) and AI-driven chip design may position it to develop more efficient, power-optimized solutions for EVs and industrial applications.

Is ON a Buy? A Contrarian's Dilemma

At $49.04, ON trades at a forward P/E of ~12, significantly below the S&P 500's 20x multiple. This discount reflects investor skepticism but also offers a margin of safety for those who believe in the company's long-term vision. The stock's 52-week range of $31.04 to $78.61 suggests volatility remains, but its current valuation appears attractive relative to peers. For example, Infineon trades at 18x forward earnings, while STMicroelectronics is at 16x.

However, the investment case hinges on timing. If macroeconomic conditions stabilize and EV demand rebounds by mid-2025, ON's strategic initiatives could unlock value. Conversely, a prolonged downturn or aggressive cost-cutting by automakers could further erode margins. Investors must weigh the risk of short-term volatility against the potential for a rebound in automotive demand and margin recovery.

Conclusion: Balancing Cautious Optimism with Pragmatism

ON Semiconductor's current selloff reflects a convergence of sector-specific and macroeconomic challenges. While its automotive sales have contracted and margins have deteriorated, the company's R&D investments, silicon carbide leadership, and capital discipline provide a foundation for recovery. For contrarian investors, the stock's discounted valuation and strong free cash flow generation make it a compelling candidate—if macro risks abate. However, those with a shorter time horizon may find the risks too acute. In a world where EV adoption and AI-driven chip demand are reshaping industries, ON's ability to navigate these crosscurrents will determine whether its recent selloff is a buying opportunity or a cautionary tale.