ON Semiconductor (ON): Navigating Earnings Declines and Valuation Opportunities

The semiconductor industry has faced significant headwinds in 2025, with supply-chain disruptions, demand volatility, and geopolitical tensions reshaping the landscape. Among the companies under pressure is ON Semiconductor (ON), which has reported steep revenue declines and margin contraction. However, its valuation multiples now trade at deep discounts relative to peers, raising questions about whether this undervaluation presents a buying opportunity—or if the fundamentals justify caution.

Earnings Declines: A Structural Challenge or Temporary Downturn?

ON's Q1 2025 results underscore a challenging environment. Revenue fell 22% year-over-year to $1.45 billion, with all key segments—Power Solutions (PSG), Advanced Solutions (ASG), and Industrial Solutions (ISG)—reporting declines. Sequentially, revenue dropped 16%, the sharpest drop since early 2021.

The decline stems from broader industry trends:
- Weak automotive and industrial demand: Inventory overhang and delayed EV production in China have dampened sales.
- Geopolitical risks: Supply-chain bottlenecks in Japan and China continue to disrupt operations.
- Competitive pressures: Peers like NXP Semiconductors (NXPI) have outperformed, with YTD gains of 1.7% versus ON's 28.5% decline.

While non-GAAP earnings remain positive ($0.55 EPS in Q1), GAAP results were hit by a $539 million restructuring charge, pushing net losses to -$1.15. The Q2 outlook is equally grim, with revenue projected to fall further to $1.4–1.5 billion.

Valuation: A Discounted Multiple or a Warranted Sell-Off?

ON's valuation metrics now reflect significant pessimism, but are they justified?

Key Metrics (as of June 2025):

Metric	ON Semiconductor	Semiconductor Sector Average
EV/EBITDA	10.96x	20.2x
Trailing P/E	11.4x	37.2x
Forward P/E	12.0x	37.2x
P/B Ratio	3.5x	4.64x

These multiples are far below industry averages, suggesting the stock is priced for continued underperformance. However, the disconnect between valuation and fundamentals is stark:
- Undervalued on paper: The EV/EBITDA ratio of 10.96x is less than half the sector average.
- Overlooked risks: The stock's 28.5% YTD decline and a Zacks “Strong Sell” rating reflect investor skepticism about its ability to recover.

Strategic Initiatives: Can Growth Investments Offset Declines?

ON is betting on silicon carbide (SiC) technology, a high-growth sector with a 30% CAGR through 2030. Recent moves include:
- A $115 million acquisition of Qorvo's SiC JFET business to bolster EV and AI infrastructure capabilities.
- A proposed $6.9 billion deal to acquire Allegro MicroSystems, aiming to combine power solutions with sensing expertise.

However, these initiatives face hurdles:
- Execution risk: The Allegro deal is awaiting regulatory approval and integration could strain resources.
- Cash flow focus: While free cash flow rose 72% year-over-year to $455 million, buybacks ($300 million in Q1) prioritize shareholder returns over revenue reinvestment.

Peer Comparison: Is ON Truly Undervalued?

To assess whether ON's valuation is a bargain, let's compare it to peers:

Company	EV/EBITDA	P/E (Forward)	Revenue Growth (YoY)
ON Semiconductor	10.96x	12.0x	-24.5%
NXP Semiconductors	14.2x	20.5x	-12%
Texas Instruments	16.8x	18.3x	-5%

ON's multiples are the cheapest, but its revenue decline is the steepest. Peers like NXP and TI have outperformed both in valuation and growth. This raises a critical question: Is ON's discount justified by its operational struggles, or is it a mispricing?

Investment Thesis: Proceed With Caution

Bull Case:

• SiC adoption accelerates: ON's leadership in SiC could drive revenue recovery as EV and AI infrastructure spending ramps up.
• Allegro deal succeeds: Synergies from the acquisition could boost margins and diversify revenue streams.

Bear Case:

• Earnings miss expectations: Q2 results (due in May) could trigger further declines if guidance is lowered.
• Execution risks materialize: Regulatory delays or integration failures could derail the Allegro deal.

Recommendation:

• Hold for now: The valuation discount is tempting, but the risk-reward balance leans toward caution.
• Watch for catalysts: Monitor Q2 earnings, Allegro's regulatory progress, and SiC revenue growth.
• Consider a long-term position: If the stock dips below $60 (15% below current levels), it could signal an oversold opportunity.

Conclusion

ON Semiconductor's valuation presents a rare discount in a historically high-priced sector. However, its earnings decline and execution risks temper optimism. Investors should treat this as a speculative play rather than a core holding until fundamentals stabilize. The stock's 16.9% upside to a $79.35 “fair price” hinges on turning around its top line—a goal that remains uncertain in today's volatile semiconductor market.

Final Take: Wait for clearer signs of revenue recovery before taking a position.