ON Semiconductor: Assessing the Discount—Untapped Value or Structural Risk?

The recent credit rating upgrade for ON Semiconductor (ON) has sparked renewed debate about its valuation. S&P Global revised the company's outlook to “stable” from “positive” in March 2025, affirming its 'BB+' issuer credit rating and 'BB' issue-level ratings on senior unsecured notes. This move, coupled with a Relative Strength (RS) rating upgrade from 68 to 71, suggests improving market confidence. However, the stock's valuation remains contentious, with a price-to-earnings (P/E) ratio of 139.41x—well above the industry average of 58.83x—while its EV/EBITDA of 11.92x appears more moderate. The question for investors is whether this discount reflects untapped value or structural risks.

Valuation Metrics: A Tale of Two Ratios

ON's elevated P/E ratio indicates that the market is pricing in significant future growth, despite the company's recent financial struggles. In Q1 2025, ON reported a 22.4% year-over-year revenue decline to $1.45 billion, driven by weak automotive demand and lower factory utilization. Meanwhile, its EV/EBITDA of 11.92x suggests a more conservative valuation relative to earnings. This divergence highlights a key tension: while the stock trades at a premium to earnings, its enterprise value relative to cash flow appears restrained.

Analysts have offered mixed price targets, ranging from $40 to $70, with an average of $57.53. The wide dispersion underscores uncertainty about ON's ability to navigate near-term challenges. For instance, 28 analysts revised their targets downward in the past quarter, with David Williams of Benchmark and Suji Desilva of Roth MKM cutting their estimates by over 20%. These adjustments reflect concerns about declining revenue and a debt-to-equity ratio of 0.38, which exceeds the industry average.

Industry Context: Growth Amid Structural Risks

The semiconductor industry is on a growth trajectory in 2025, with global sales projected to reach $697 billion, driven by demand for AI chips and data center expansion. However, this growth is uneven. Companies with exposure to AI and high-value components have outperformed, while those reliant on traditional markets like automotive and consumer electronics lag behind. ON's recent struggles in the automotive segment—where revenue fell 26% sequentially in Q1 2025—highlight this vulnerability.

A critical risk for the industry is its reliance on a narrow set of high-margin products. For example, generative AI chips accounted for over 20% of total chip sales in 2024 but represented less than 0.2% of wafer production. This mismatch between revenue generation and manufacturing efficiency could pressure margins for companies like ON, which lack significant AI exposure.

Strategic Positioning in High-Growth Segments

Despite these challenges, ON's long-term prospects hinge on its strategic investments in silicon carbide (SiC) and electric vehicles (EVs). The SiC market, valued at $2.1 billion in 2024, is projected to grow at a 25.9% CAGR to $21 billion by 2034, driven by EV adoption. ON has positioned itself as a key player in this space, with 8-inch wafer production and multi-billion-dollar supply agreements with global EV manufacturers. Its CEO, Hassane El-Khoury, has emphasized SiC as a “key growth driver” for the company.

Comparatively, ON's valuation appears undervalued relative to peers in the SiC sector. Wolfspeed, for instance, trades at a negative P/E and EV/EBITDA of -5.53, reflecting its financial struggles despite strong SiC shipments. Infineon, a dominant player in the SiC market with a 15% share, has a P/E of 22.91x and EV/EBITDA of 13.54x, making ON's metrics appear more attractive. This suggests that ON's discount may reflect short-term operational challenges rather than long-term structural risks.

Risks and Opportunities

The semiconductor industry's cyclical nature remains a wildcard. Over the past 34 years, the sector has experienced nine growth-to-shrinkage cycles, and ON's recent revenue decline underscores its vulnerability. Additionally, rising R&D costs—now 52% of EBIT in 2024, up from 45% in 2015—could strain margins if ON fails to achieve returns on its SiC investments.

However, ON's strong profitability metrics, including a 22.06% net margin, and its focus on high-growth areas like EVs and SiC provide a counterbalance. The company's free cash flow of $455 million in Q1 2025, despite revenue declines, also demonstrates operational resilience. Share repurchases of $300 million further signal management's confidence in the stock's intrinsic value.

Conclusion: A Discount Worth Considering

ON Semiconductor's valuation discount reflects both industry-wide challenges and company-specific risks. While its elevated P/E ratio and recent revenue declines are concerning, its EV/EBITDA and strategic positioning in the SiC and EV markets suggest untapped value. The recent S&P rating upgrade and RS rating improvement indicate improving fundamentals, and the company's focus on high-growth segments aligns with long-term industry trends.

For investors, the key question is whether ON can execute its SiC strategy effectively. If the company can capitalize on the EV transition and maintain its profitability, the current discount may represent an opportunity. However, those wary of cyclical risks or execution challenges should approach with caution. In a sector defined by volatility, ON's path to value creation will depend on its ability to navigate near-term headwinds while scaling its high-growth bets.