Understanding ON Semiconductor’s Recent Downward Trend

The semiconductor sector is known for its cyclical nature—periods of rapid expansion are often followed by contractions. On Semiconductor(ON) (onsemi) is no stranger to these shifts, and recent developments have put the spotlight on the challenges the company faces. Below is a comprehensive analysis of the key factors that have contributed to onsemi’s recent downward trend and what retail investors may want to keep in mind.

1. Cyclical Nature of the Semiconductor Industry

The semiconductor industry is inherently volatile, driven by fluctuating demand for consumer electronics, automobiles, industrial equipment, and more. In 2023, onsemi encountered a slowdown in its major end markets. After a prolonged period of high demand—partly driven by pandemic-related disruptions—several sectors began adjusting inventories and scaling back orders.

• Highs and lows of semiconductors: When consumer and industrial demand is strong, chip manufacturers often expand production, which later leads to oversupply during the inevitable downcycle.

• Impact on onsemi: Excess capacity and reduced orders in its largest segments, especially automotive, have weighed on profitability and stock performance.

2. Decline in Key End Markets

Automotive Market Weakness

With the automotive sector representing over half of onsemi’s revenue, the company is particularly vulnerable to carmakers’ shifts in production and inventory strategy. By the third quarter of 2023:

• Significant inventory reductions: Major automakers, responding to concerns of overstocked components post-pandemic, scaled back chip orders.

• Sales decline: Automotive chip sales for onsemi dropped by 21% from their peak in the third quarter of 2023, underscoring the broader industry’s retreat from the pandemic-era buying frenzy.

Industrial Sector Headwinds

While the automotive segment garners the most attention, the industrial sector (encompassing robotics, factory automation, and industrial power solutions) also reduced demand. Many industrial customers, worried about a sluggish global economic environment, trimmed capital expenditures, further eroding onsemi’s sales volumes.

3. Financial Performance and Outlook

Despite efforts to diversify and streamline operations, onsemi’s most recent financial results reflect ongoing headwinds:

• Third Quarter 2024 Results

• Revenue: $1.76 billion, a nearly 20% year-over-year decline.

• Sales by Segment:

• Power Solutions Group: Down 23%.

• Analog and Mixed-Signal Group: Down 16%.

• Intelligent Sensing Group: Down 15%.

• Conservative Guidance:

For the following quarter, the company forecast revenues in the range of $1.71 billion to $1.81 billion, reflecting cautious optimism but underscoring the uncertainty in market demand.

These figures highlight the breadth of the slowdown across onsemi’s core businesses. When nearly all segments register double-digit percentage declines, it signals a systemic challenge rather than isolated weakness.

4. Analyst Downgrades

In response to the company’s decelerating growth and conservative outlook, multiple analysts have reassessed their positions on the stock:

• Truist Securities: Downgraded onsemi to a “hold” rating and cut its price target from $85 to $60, citing deteriorating demand trends in automotive and other key markets.

Analyst downgrades can have a cascading effect on market sentiment, as they often prompt institutional investors to reevaluate holdings, which can, in turn, create further downward pressure on the share price.

5. Competitive and Operational Challenges

To navigate the harsh industry landscape, onsemi has embarked on a series of restructuring efforts. However, the company continues to face stiff competition from other semiconductor players and must contend with operational hurdles:

• Restructuring Initiatives:

onsemi has exited some underperforming sectors and consolidated manufacturing sites to optimize production capacities and reduce overhead.

• Job Cuts:

The company recently announced plans to cut approximately 1,000 jobs, aiming to reduce costs and streamline operations. However, layoffs can also hamper morale and disrupt productivity if not managed carefully.

• Increased Competition:

In key growth areas like advanced driver-assistance systems (ADAS) and electric vehicles (EVs), onsemi faces well-established competitors with deep pockets. The challenge lies in balancing R&D investments against a backdrop of declining revenues.

What This Means for Retail Investors

1. Volatility is the Norm

Semiconductor stocks are not for the faint of heart. Even industry leaders can see sharp swings in valuation due to changing market conditions.

2. Watch the Automotive Recovery

Because the automotive segment constitutes a large slice of onsemi’s revenue, any rebound in car production and the broader automotive supply chain could signal a turnaround. Keeping an eye on automakers’ inventory strategies and electric vehicle adoption rates will be crucial.

3. Management’s Focus on Profitability

Restructuring efforts could eventually lead to better margins if executed well. However, investors should monitor quarterly results to see if cost-saving measures are translating into improved profitability.

4. Analyst Sentiment

Analyst upgrades or downgrades can significantly influence stock movement. If demand stabilizes or picks up, analysts may revise their forecasts upward.

5. Long-Term Perspective

For those who believe in the megatrends of electric vehicles, industrial automation, and smart sensing technologies, onsemi could remain an interesting long-term play. The current downcycle may present opportunities for investors willing to weather short-term volatility.

Conclusion

onsemi’s recent stock decline can be traced to a confluence of factors: the inherently cyclical nature of the semiconductor industry, weaker demand in its key automotive and industrial markets, conservative financial guidance, analyst downgrades, and persistent operational challenges. While the current environment looks challenging, the semiconductor industry’s history shows that downturns often precede the next wave of growth—particularly as new technologies emerge.

For retail investors, the key is to remain vigilant. Monitoring shifts in automotive orders, macroeconomic indicators, and the company’s restructuring progress will provide essential clues about onsemi’s future trajectory. As with any investment, it’s prudent to balance potential rewards with the inherent risks of a cyclical industry. If you’re considering onsemi or any semiconductor stock, be sure to conduct thorough research, stay updated on industry trends, and consider consulting a financial advisor for personalized guidance.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Always perform your own research or consult with a professional advisor before making any investment decisions.