ON Semiconductor: A Hidden Gem in the EV Revolution—Why the Undervalued Semiconductor Leader is a Buy Now

The semiconductor sector has faced a brutal reckoning over the past year, with oversupply and demand volatility slamming valuations. But in this environment, ON Semiconductor (ON) stands out as a rare opportunity: a company with $455 million in free cash flow (up 72% year-over-year) and a $23 billion market cap, yet still trading at a valuation discount that ignores its secular growth tailwinds. Investors are overlooking the company’s dominance in silicon carbide (SiC)—the key semiconductor material enabling faster, more energy-efficient electric vehicles (EVs)—and its strategic restructuring to capitalize on this $100+ billion market opportunity.

Let’s break down why the bears are wrong and why ON is a compelling buy at current levels.

The Valuation Disconnect: Strong Cash Flows vs. Near-Term Headwinds

While ON’s Q1 2025 results showed a 16% sequential revenue drop and a GAAP net loss of $(0.95) per share (due to restructuring charges), its non-GAAP metrics tell a different story:
- Free Cash Flow (FCF) rose 72% year-over-year, with 66% of it returned to shareholders via buybacks.
- Cash reserves hit $2.76 billion, providing a fortress-like balance sheet to weather near-term storms.

The market is fixated on automotive sector softness—a 25% sequential revenue decline in Q1—driven by European EV adoption delays and inventory digestion. But this ignores two critical factors:
1. Chinese EV demand is surging, with ON’s SiC partnerships (e.g., with BYD and NIO) set to ramp in H2 2025.
2. Restructuring is cutting fixed costs, with a 9% workforce reduction and plant rationalization already in motion.

The Silicon Carbide Opportunity: A 10-Year Growth Engine

Silicon carbide is the material of choice for EV power inverters, enabling faster charging, longer range, and smaller batteries. ON’s acquisition of Corbus SiC JFET technology in 2024 gives it a $1.3 billion total addressable market (TAM) through 2030.

Here’s why this matters:
- EVs need 10x more SiC content than traditional vehicles, and Chinese automakers are leading the charge.
- 800V battery systems, now standard in premium EVs, require SiC to handle higher voltages safely.
- ON’s Treo platform—a 65nm BCD process for AI data centers and automotive systems—is already winning design wins, with revenue contributions expected by late 2025.

Even if automotive demand stays weak in Q2, the long-term growth in SiC and industrial/AI markets is non-negotiable.

Margin Improvements Are Coming—And the Market Isn’t Pricing Them In

While Q2 non-GAAP gross margins are expected to dip to 36.5%–38.5%, this is a temporary issue. Here’s why margins will recover:
- Utilization rates will rebound as automotive and industrial demand stabilize.
- SiC sales will boost average selling prices (ASPs)—SiC modules command 3–5x the margins of legacy silicon devices.
- Cost discipline is already working: CapEx is being slashed to $150 million in Q2, and non-core businesses (which dragged down margins) are being exited.

Analysts estimate that by 2026, SiC alone could contribute 25% of ON’s revenue, pushing margins back above 40%. Yet the stock’s P/E ratio (using non-GAAP EPS of $0.55) is just 42x, far below peers like TI (TXN) at 48x and Infineon (IFX) at 45x. This is a valuation misfire.

The Bear Case—and Why It’s Overblown

Bears argue that inventory overhang and geopolitical risks (e.g., U.S. EV tax credits) could delay recovery. But:
- Inventory is being managed: Base inventory (excluding strategic SiC builds) is at 115 days, within target ranges.
- China’s EV boom is real: BYD’s Q1 deliveries rose 85% year-over-year, and ON’s SiC partnerships are already locking in supply.
- The company’s balance sheet is bulletproof: With $3 billion in cash and no near-term debt maturities, ON can outlast the downturn.

A Buy Signal Ignored by the Market

The market is pricing in a worst-case scenario, but the reality is brighter:
- Free cash flow buybacks will shrink the share count and boost EPS.
- SiC adoption is accelerating, with ON’s design wins in AI data centers (PSUs for GPUs) and smart infrastructure adding diversification.
- Valuation multiples are cheap: At $45.77 (May 13 close), ON trades at 1.2x EV/EBITDA (vs. 2.1x for peers) and 42x forward P/E—a bargain for a company with 20%+ FCF growth visibility.

Final Call: Buy ON Now—The Catalysts Are Imminent

The next 12 months will see three catalysts that could re-rate the stock:
1. H2 2025 SiC ramp: Chinese EVs using ON’s SiC modules will hit the road.
2. Treo platform adoption: AI data center demand will boost margins.
3. Margin recovery: Cost cuts and utilization improvements will lift non-GAAP EPS to $2.30–$2.50 by 2026.

Act now before the market catches on. ON’s valuation is a screaming buy at these levels, and the EV/AI tailwinds will propel it higher.

Risk Rating: Moderate (near-term automotive demand risks).
Price Target: $65–$70 by end-2025.

ON Semiconductor is a must-buy for investors willing to look past short-term noise and into the EV-driven future. Don’t miss this chance to own a leader in a $100 billion market.