ON Semiconductor: A Hold in a Bull Market Is a Sell Opportunity

The semiconductor industry is roaring. Driven by artificial intelligence (AI), data center expansion, and advanced chip technologies, the sector's sales are projected to hit $697 billion in 2025—a 11% increase from 2024. Yet ON Semiconductor (ON), a major player in power management and analog chips, is lagging behind. Despite its stock rising 23% over the past month—a period when the broader market and semiconductor sector surged—the company's fundamentals tell a cautionary tale. A deep dive into its earnings trajectory, valuation, and strategic missteps reveals why investors should consider this a sell opportunity.

The Disconnect: Strong Sector, Weak Fundamentals

The semiconductor industry's boom is fueled by AI, with generative AI (gen AI) chips alone accounting for 20% of 2024 sales. Companies like Taiwan Semiconductor Manufacturing (TSM) and NVIDIA (NVDA) are reaping rewards from this shift, with TSM's P/E ratio hitting 22.5x and NVIDIA's trailing P/E near 34x. By contrast, ON Semiconductor's valuation metrics raise red flags:

• P/E Ratio: At 92.5x (using mid-quarter earnings estimates), ON trades at a premium to its sector peers. This is unsustainable given its declining earnings.
• P/B Ratio: While its 2.53x is moderate, the company's return on equity (ROE) of just 得罪了 7.9% signals poor capital efficiency.
• Revenue Growth: The current quarter's revenue is expected to fall 16.4% year-over-year, contrasting with the sector's 7.5% CAGR.

Earnings Revisions Paint a Dismal Picture

The Zacks Rank #3 (Hold) for ON reflects near-term stagnation, not opportunity. Key concerns:

1. Earnings Downgrades:
2. Analysts have slashed the fiscal year 2025 earnings estimate by 6.5% over 30 days, and the next fiscal year's forecast dropped 12.6%.
3. Current quarter EPS is projected to drop 43.8% YoY to $0.54, with revenue falling to $1.45 billion—a 22.4% YoY decline.
4. Historical backtests confirm that when ON misses earnings expectations, its stock tends to underperform. Over the past three years, such misses led to a maximum return of -0.21% over two days following the event.

1. Margin Pressures:

2. Gross margins are narrowing, with Q1 2025 net profit margins at 9.5%, down from 26.6% a year earlier. Cost-cutting hasn't offset declining demand in legacy markets like PCs and smartphones.

3. Strategic Misalignment:

4. ON's focus on power management and automotive chips leaves it exposed to slowing demand in traditional sectors. Meanwhile, AI-driven segments like gen AI chips—accounting for 20% of industry sales—are dominated by peers like AMD (AMD) and Intel (INTC).

Valuation: Overpriced for a Lagging Player

While ON's Zacks Value Style Score of B suggests it trades at a discount to peers, this ignores the broader context:

• Sector Valuations: The semiconductor industry's average P/E is 62.1x, but this is buoyed by AI leaders like NVIDIA and TSM. ON's 92.5x P/E is a 49% premium to this average.
• Cash Flow vs. Debt: Though free cash flow rose 72% YoY in Q1, its long-term debt of $3.35 billion and low ROE indicate poor capital allocation.

Investors are pricing in growth that isn't materializing. Even if ON's stock outperformed in the short term (e.g., +23% over a month), its fundamentals don't justify the valuation.

Why Sell Now?

1. Earnings Downgrades Outweigh Positive Surprises:

2. While ON beat EPS estimates in three of the last four quarters, the trend is downward. A -42% drop in fiscal year earnings suggests no near-term rebound.

3. Sector Leadership Is Elsewhere:

4. The semiconductor winners are those riding the AI wave. ON's lack of exposure to gen AI chips and advanced packaging (e.g., TSM's CoWoS technology) leaves it behind.

5. Zacks Rank #3 Is a Sell Signal in This Context:

6. A “Hold” rating implies stagnation, not growth. With the broader market and sector advancing, investors can find better bargains.

Investment Recommendation

Sell ON Semiconductor (ON). The company's declining revenue, deteriorating margins, and misalignment with AI-driven growth make it a laggard in an otherwise robust sector. Investors should rotate into peers like TSM or AMD, which are capitalizing on structural trends.

ON's valuation is a mirage—a premium price for a company lacking the catalysts to justify it. Until it pivots to high-growth segments or reverses earnings declines, the stock remains a sell.

This article is for informational purposes only and not financial advice. Always conduct your own research before making investment decisions.