ON Semiconductor: A Discounted Gem in the Analog Semiconductor Surge?

The semiconductor sector is in the midst of a secular shift, driven by artificial intelligence (AI), electric vehicles (EVs), and the Internet of Things (IoT). Yet ON Semiconductor Corp. (NASDAQ: ON) trades at a significant valuation discount to peers despite its central role in analog and mixed-signal chips—a segment critical to these growth trends. With a Forward P/E of 19.3x as of June 2025, ON sits far below Texas Instruments (TXN, 38.98x) and Analog Devices (ADI, 30x), even as its end markets, such as automotive and industrial, are booming. This creates an intriguing paradox: Is ON's valuation a sign of justified skepticism, or a missed opportunity in a sector poised for decades of expansion?

Valuational Discount: A Reflection of Near-Term Weakness or Overreaction?

ON's valuation discount stems from immediate challenges: declining revenue (projected to drop 9.8% over 12 months), weak free cash flow, and execution concerns. Analysts label it a “value trap,” citing tepid sales growth and management's struggles to capitalize on rising demand for analog chips in EVs and AI infrastructure. The Zacks Rank #3 (Hold) underscores this skepticism, emphasizing near-term risks over long-term potential.

But this narrow focus overlooks a critical point: ON's core analog/mixed-signal business is in the sweet spot of a structural boom. Analog chips, which convert real-world signals into digital data, are irreplaceable in EVs (battery management systems), AI servers (power regulation), and IoT devices. While ON's revenue has stumbled in the short term, its order backlog for automotive and industrial segments remains robust, with AI server adoption alone poised to double its addressable market.

Sector Tailwinds: Analog Chips Are the New Oil

The analog semiconductor market is expected to grow at a CAGR of 7.8% through 2030, fueled by:
1. AI Infrastructure: Data centers are adopting mixed-signal chips to manage power in high-density AI servers.
2. EV Penetration: Each EV requires $200–$400 in analog chips, versus $30 in internal combustion engines.
3. Industrial IoT: Smart factories and smart cities will rely on ON's sensors and connectivity solutions.

ON's patent portfolio—with over 1,000 granted patents in power management and sensor technologies—positions it well to capture this demand. Its recent wins in automotive contracts, such as a $1.2 billion deal with BMW for advanced driver-assistance systems (ADAS), underscore its relevance in high-margin segments.

Risks: Near-Term Headwinds and Competitive Pressures

The bear case is clear:
- Revenue Decline: ON's sales have fallen for two consecutive quarters, driven by macroeconomic softness and inventory corrections in consumer electronics.
- Margin Pressures: Currency headwinds (a stronger euro) and rising R&D costs could strain profitability.
- Competitive Threats: TI and Infineon (IFX, 14.60x Forward P/E) are aggressive in analog markets, while foundries like TSMC are expanding analog production.

However, these risks are sector-wide, not unique to ON. The Zacks Rank's “Hold” ignores the fact that analog/mixed-signal stocks have historically outperformed broader semiconductor indices during downturns. ON's diversified end markets (43% industrial, 32% automotive) provide a buffer against cyclical volatility.

Why the Zacks Rank Might Be Too Cautious

The Zacks Rank #3 reflects short-term pessimism but overlooks two key factors:
1. Valuation Floor: At 19.3x forward earnings, ON trades at a 50% discount to ADI and 75% discount to TI. Even if earnings grow modestly, the stock could rebound sharply.
2. GuruFocus Upside: The platform's 12.74% upside target implies a price of $59.50—reachable if ON delivers on its automotive and industrial backlog.

Investment Thesis: Buy on Dips, Mind the Catalysts

Action: Accumulate ON on dips below $50, with a 12–18 month horizon.
- Catalyst 1: Q3 2025 earnings, where automotive revenue growth (currently 6% sequentially) could surprise to the upside.
- Catalyst 2: Infineon's tariff dispute resolution (a drag on ON's peers) could shift demand its way.
- Catalyst 3: AI server adoption rates exceeding 2025 forecasts, boosting orders for power-management chips.

Historical data supports this approach: A strategy of buying ON on Q3 earnings days and holding for 30 days since 2020 delivered a 16.05% annualized return with a total return of 125.15%, though it carried risks like a -64.31% maximum drawdown. While volatility is inherent, the positive excess return of 15.20% and Sharpe ratio of 0.39 suggest the strategy could amplify gains during favorable earnings catalysts, aligning with the thesis to capitalize on ON's undervalued growth potential.

Final Analysis

ON's valuation discount is excessive relative to its long-term prospects. While near-term headwinds are real, the analog semiconductor market's secular growth—and ON's entrenched position within it—suggests the stock is primed to rebound. For investors willing to look past quarterly noise, ON could be a rare value play in a high-growth sector.

Disclaimer: This analysis is for informational purposes only. Always conduct your own research before making investment decisions.