ON Semiconductor: Navigating Near-Term Headwinds to Capture the AI and EV Future

The semiconductor industry is at a crossroads, buffeted by cyclical demand swings and secular shifts toward artificial intelligence (AI) and electric vehicles (EVs). ON Semiconductor (NASDAQ: ON) finds itself in the thick of this transition, grappling with a challenging near-term outlook while positioning itself at the forefront of two of the most promising long-term trends: AI data centers and Silicon Carbide (SiC) technology. Its Q1 2025 results underscore both vulnerabilities and opportunities, making it a compelling case study for investors willing to look beyond short-term noise.
The Near-Term Struggle: Automotive Drag and Margin Pressures
ON Semiconductor's Q1 2025 earnings revealed a stark dichotomy. While its AI data center segment saw revenue more than double year-over-year, the company's broader performance was weighed down by a 26% sequential decline in automotive revenue, driven by weakness in Europe and seasonal factors in Asia. This segment, a historical pillar of growth, now faces structural challenges as automakers grapple with excess inventory and shifting consumer preferences.
The margin picture is equally challenging. Non-GAAP gross margins dropped to 40%, a 530 basis-point sequential decline, due to under-absorption from lower revenue and pricing pressures in certain segments. To address this, ON Semiconductor announced a 9% global workforce reduction and intensified its “Fab Right” initiative to optimize manufacturing capacity. While painful in the short term, these moves aim to realign costs with evolving demand dynamics.
The Long-Term Play: AI and SiC as Growth Catalysts
Amid the turbulence, ON Semiconductor's strategic bets are gaining traction. Its AI data center revenue, though not yet a standalone segment, is accelerating at a breakneck pace, driven by advanced sensor technologies like the Hyperlux ID family. These sensors are critical for cooling and power management in next-generation AI servers, where thermal efficiency is paramount.
The company's SiC leadership is another pillar of its future growth. With global EV adoption set to surge—the EV market is projected to reach 30% of passenger vehicle sales by 2030—SiC, which improves battery efficiency and charging times, is becoming indispensable. ON Semiconductor has secured key design wins in China's EV ecosystem and is advancing its SiC manufacturing capabilities. Its “Fab Right” strategy aims to reduce costs by 30% by 2026, positioning it competitively against peers like Analog Devices (ADI) and NXP Semiconductors (NXPI).
Competitive Positioning: Strengths and Weaknesses Against Peers
- Analog Devices: Offers a broader portfolio, including sensors and signal processing for industrial and automotive markets. However, ON Semiconductor's focus on power and sensing solutions in AI/EV ecosystems gives it a sharper edge in high-growth niches.
- NXP Semiconductors: Dominates automotive infotainment and connectivity but trails in SiC and AI infrastructure. ON's AI data center momentum and SiC scale could outpace NXP in the EV/AI era.
The key differentiator for ON Semiconductor is its portfolio rationalization. Unlike peers still grappling with legacy businesses, ON is aggressively divesting non-core assets (e.g., its imaging division) to concentrate on AI, EVs, and industrial automation.
Valuation: A Discounted Entry Point for Long-Term Investors
ON Semiconductor's stock has underperformed peers in 2025, reflecting near-term concerns. However, its free cash flow (FCF) surged 72% year-over-year to $455 million, enabling buybacks at a 66% FCF payout ratio. Management plans to increase this to 100% for 2025, signaling confidence in the company's long-term value.
At current levels, ON trades at 10.5x forward EV/EBITDA, a discount to ADI (15.2x) and NXPI (12.8x). This discount is unwarranted given its structural advantages in AI and SiC, which are underappreciated in the near-term earnings noise.
Investment Thesis: Buy the Dip, Focus on the Long Game
The risks are clear: automotive weakness could linger, and margin recovery hinges on execution. However, the strategic clarity of ON Semiconductor's shift toward AI and SiC—coupled with its FCF resilience and undervalued stock—suggests this is a prime time to establish a position.
Actionable Advice:
1. Buy on dips below $30/share, targeting the $25–$30 range where valuation metrics are compelling.
2. Hold for 3+ years to capture the AI and EV inflection points.
3. Monitor: SiC design wins, gross margin stabilization, and Q2 guidance adherence.
Conclusion
ON Semiconductor is a company in transition—its near-term struggles are real, but its long-term narrative is compelling. For investors with a patient horizon, the underperformance presents a rare opportunity to invest in a firm poised to capitalize on two of the most transformative trends of the next decade. The path to sustained growth is clear, and the current valuation offers a margin of safety for those willing to look beyond the next quarter.
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