ON Semiconductor: Navigating Near-Term Headwinds for Long-Term Growth in EVs and AI

The semiconductor industry remains a classic example of cyclical volatility, where short-term macroeconomic headwinds often mask long-term structural growth opportunities. For ON Semiconductor (onsemi), the current landscape is no different. While the company faces near-term challenges from U.S.-China trade tensions and inventory adjustments in the automotive sector, its strategic focus on silicon carbide (SiC) adoption, AI-driven data center expansion, and supply chain resilience positions it as a compelling long-term investment.

Near-Term Headwinds: Tariffs and Order-Book Dynamics

The 2025 tariff environment has introduced significant uncertainty for global semiconductor manufacturers. According to a report by the Information Technology and Innovation Foundation (ITIF), U.S. semiconductor tariffs could reduce GDP growth by 0.18% in the first year and 0.76% by the 10th year, stifling competitiveness in AI and EV sectors [1]. For onsemi, which operates a globally integrated supply chain, these tariffs risk inflating costs for critical materials like gallium and germanium—inputs for compound semiconductors used in EVs and AI applications [2].

However, onsemi’s diversified manufacturing footprint mitigates direct exposure. The company reported minimal near-term tariff impact in Q2 2025, despite a 26% sequential decline in automotive revenue due to inventory digestion [3]. This resilience stems from its strategic shift to vertically integrated production and regional redundancy, which aligns with broader industry trends of reshoring and supply chain diversification [4].

Long-Term Growth Drivers: SiC Adoption and AI Expansion

The company’s long-term value proposition lies in its leadership in SiC technology, a critical enabler for EVs and AI. SiC’s superior efficiency in power conversion systems makes it indispensable for next-generation EVs, where it reduces energy losses and enhances thermal management. Onsemi’s Q2 2025 results underscored this momentum: SiC revenue in China doubled due to production ramps in new EV models, with the company securing design wins in 50% of new EVs showcased at the Shanghai Auto Show [5].

Strategic partnerships further accelerate this growth. A $20 million collaboration with Stony Brook University and Empire State Development aims to establish a research center for SiC crystal growth and processing, targeting cost reductions and material quality improvements [6]. This investment not only strengthens onsemi’s R&D pipeline but also aligns with global EV adoption trends, where SiC is projected to capture 35–40% of the power semiconductor market by 2027 [5].

In the AI sector, onsemi is capitalizing on the explosive demand for data center infrastructure. Its “Other” segment, which includes AI data center revenue, grew 16% quarter-over-quarter in Q2 2025, with revenue nearly doubling year-over-year [5]. The company’s Treo manufacturing platform and EliteSiC™ Power Modules are now integral to modular uninterruptible power supply (UPS) systems and AI server power supplies, addressing the sector’s need for high-efficiency, high-margin solutions [5].

Financial Resilience and Shareholder Returns

Onsemi’s financial health reinforces its strategic flexibility. With a current ratio of 4.95x and $2.69 billion in cash and equivalents as of 2024, the company has ample liquidity to fund R&D, expand manufacturing, and return capital to shareholders [3]. Its disciplined cost management and 9.4% R&D spend (TTM) position it to navigate cyclical downturns while maintaining innovation momentum [3].

The company has also committed to returning 100% of free cash flow to shareholders in 2025, a pledge it fulfilled in Q2 by repurchasing over 100% of year-to-date free cash flow [5]. This focus on shareholder value creation, combined with gross margin expansion targets of 53% by 2027, underscores its commitment to long-term value generation [5].

Conclusion: A Cyclical Play with Structural Upside

ON Semiconductor exemplifies strategic resilience in a volatile sector. While near-term tariff pressures and order-book dynamics create headwinds, the company’s focus on SiC adoption, AI-driven data center expansion, and supply chain diversification positions it to outperform in the long term. With a robust balance sheet, aggressive R&D investment, and clear path to margin expansion, onsemi offers an undervalued opportunity for investors seeking exposure to the EV and AI megatrends.

Source:
[1] Short-Circuited: How Semiconductor Tariffs Would Harm the U.S. Economy, [https://itif.org/publications/2025/05/21/short-circuited-how-semiconductor-tariffs-would-harm-the-us-economy/]
[2] Tariffs & CHIPS Act Shake Electronics Industry Supply Chains, [https://www.designnews.com/electronics/electronics-industry-grapples-with-tariff-uncertainty-chips-act-future]
[3] ON Semiconductor Q1 2025 Earnings Call Transcript, [https://www.investing.com/news/transcripts/earnings-call-transcript-on-semiconductor-q1-2025-beats-expectations-amid-stock-drop-93CH-4022338]
[4] Semiconductor Stock Forecast for the Rest of 2025, [https://money.usnews.com/investing/articles/semiconductor-stock-forecast-for-the-rest-of-2025]
[5] ON Semiconductor Q2 2025 Earnings Call Highlights, [https://finance.yahoo.com/news/semiconductor-corp-q2-2025-earnings-070148658.html]
[6] ON Semiconductor to Establish Research Center for Wide Bandgap Materials at Stony Brook University, [https://www.onsemi.com/company/news-media/press-announcements/en/onsemi-to-establish-research-center-for-wide-bandgap-materials-at-stony-brook-university]