Is Onsemi a buy despite the poor outlook?

ON Semiconductor (NASDAQ:ON) shares jumped about 10% on Monday after the company reported fourth-quarter earnings that beat analysts’ estimates.

But the company’s first-quarter 2024 revenue target fell short of expectations, even though it expected to grow at twice the rate of the market. The question now is whether the company (popularly known as ON Semiconductor) is buying where it expects the semiconductor market to weaken further.

Highest expected performance in the 4th quarter

Onsemi’s stock got hot Monday after its 2023 fourth quarter and full-year results were much better than expected.

To put the results in perspective, there were some concerns heading into the fourth quarter after the company cited a road crash caused by a customer.

“The recent decline in demand from a single automotive OEM (original equipment manufacturer) will impact our $1 billion goal and we now have over $800 million worth of silicon carbide (SiC),” CEO Hassane El-Khoury said in the third quarter earnings call. We expect to ship it. ) By 2023, sales will be four times that of last year.”

Onsemi’s stock price fell about 25% to about $62 per share in late October on the news. The company’s fourth-quarter revenue outlook was $1.95 billion to $2.05 billion, with diluted earnings expected to be between $1.10 and $1.24 per share.

So the market may have felt relieved when Onsemi’s actual sales for the fourth quarter hit a high of $2.02 billion and earnings exceeded expectations at $1.29 per share. Consensus estimates were for revenue of $2 billion and EPS of $1.20.

On the fourth quarter earnings call, the CEO did not elaborate on those SiC customers and the decline in demand other than to say, “We did exactly what we guided last quarter, and overall it was higher than the third quarter.”

El-Khoury added that it was an overall good year for SiC chip shipments despite the challenges, as Onsemi recorded the highest revenue growth in the industry, captured a 25% market share, and increased its customer base to more than 600 customers. Yes.

Demand expected to slow in 2024

Onsemi’s fourth-quarter performance was solid, but its first-quarter guidance fell short of analysts’ expectations. In its outlook, the company called for revenue in the range of $1.8 billion to $1.9 billion, slightly below the consensus estimate of $1.92. Earnings are expected to range from 94 cents to $1.06 per share, below the consensus estimate of $1.10 per share.

SiC chips manufactured by ON Semi are in high demand among electric vehicle (EV) manufacturers because they can handle higher voltages. However, EV production growth is expected to slow in 2024 due to high inventory on dealer lots, which could impact Onsemi’s sales.

El-Khoury also said on the earnings call that overall market growth is expected to be slower than analysts are targeting.

“While market reports still predict silicon carbide growth of 30-40% in 2024, the latest EV plans from OEMs indicate more modest growth, signaling that SiC market growth will be in the 20-30% range,” he said. said.

But the CEO is confident that whatever the numbers, Onsemi will grow twice as fast as the overall market.

“The issue is now linked to end demand, which is why we are still very confident that the market growth will double,” El-Khoury said. “The question is what the market will be like in 2024 based on some of the announcements that have been made so far, but it is demand driven.”

Long-term growth remains promising

Obviously, investors should keep an eye on EV production in 2024, but as El-Khoury said, this is more of a long-term growth trend.

“EVs will continue to grow. It doesn’t matter if you are in your 20s, 30s, 30s or 40s. “Given that the penetration of silicon carbide and EVs is still less than 25%, and EVs in general are less than 25%, it is going to grow, and it is multi-decade growth,” the CEO said.

Despite the uncertain near-term outlook, Onsemi appears to be a good long-term buy, as it trades at a very reasonable valuation of just 15 times earnings. Despite Monday’s gains, the company’s valuation remains attractive, with shares down slightly on Tuesday and down about 2% as of midday.