What is this unique semiconductor play all about?

It's time to talk about a semiconductor name that has shown resilience throughout 2022. Let's take a deep dive into $ON, otherwise, known as On Semiconductor.

Current Price: $61.48

52/Wk High: $77.28

52/Wk Low: $44.76

Market Cap: $26.58 Billion

Dividend: None

Read below for the deep dive.

Throughout 2022 investors have had to deal with more than their fair share of diversity. From endless Fed talk to inflation bringing the end of civilization, the talking heads seem to focus on everything aside from individual companies and their unique prospects.

On Semiconductor ($ON) is a unique semiconductor company based in the United States that specializes in power solutions, intelligent sensing, and much more.

The company caters to not only major industries such as the automotive industry but key megatrends such as energy infrastructure, vehicle electrification, factory automation, and advanced driver assistance systems (ADAS).

In fact, in the company’s second-quarter earnings report, management pointed to On Semiconductor's exposure to major megatrends such as vehicle electrification.

“Electric vehicles require up to $700 of incremental Onsemi content for drivetrain and onboard charging as compared to an internal combustion engine car. As the transition continues to accelerate from ICE vehicles to electric, we expect to see steep growth in our Intelligent Power revenue for automotive,” CEO Hassane El-Khoury said.

Furthermore, El Khoury doubled down on strength via ICE vehicles and EVs throughout the Q3 earnings call.

“The number of sensors per car will continue to grow and the level of sophistication delivered by the latest generation systems is also driving ASPs higher. Safety rating requirements for new vehicles continue to increase, such as a broader field of view and higher-resolution sensors, accelerating the shift from 1 megapixel image sensors to 8 megapixel sensors for ADAS applications,” El-Khoury said.

Not only did El-Khoury boast about future growth in relation to electric vehicles, but the CEO also wrote home about Onsemi’s solar exposure.

“The volatility in global energy markets is driving an accelerated transition to alternative energy. And with a broad portfolio of silicon carbide and silicon power modules, we have emerged as a leader in this market. The top 10 solar inverter providers in the world collectively have a market share of 80%, and we have now signed LTSAs with 8 of them.” El-Khoury noted.

Driving Onsemi’s growth is the company’s two key focuses; intelligent sensing and intelligent power solutions.

The company’s intelligent sensing technologies drive development and improvement throughout the automotive industry in terms of safety and autonomous driving, while empowering intelligent automation and improving energy efficiency.

Looking to the future, Onsemi management believes the intelligent sensing market will maintain a 10% TAM CAGR from 2021 to 2025.

Source: Onsemi Q3 Investor Earnings Presentation

Shifting into intelligent power solutions, Onsemi’s power solution technologies provide auto companies the ability to develop electric vehicles that are lighter, longer-range, and more efficient not only on the road but when charging.

Outside of electric vehicles, the company’s power solutions propel efficiency within industrial systems while accelerating the de-carbonization of power grids.

As for future growth, leadership believes the intelligent power market will maintain a 6% TAM CAGR until 2025.

On the topic of total addressable market (TAM), Onsemi believes key drivers in future growth will include industrial and automotive industries, alongside cloud and 5G.

Furthermore, the company believes the automotive and industrial sectors will continue to expand.

Source: Onsemi Q3 Investor Earnings Presentation

Onsemi operates through three key reported segments; Power Solutions Group (PSG), Advanced Solutions Group (ASG), and finally Intelligent Sensing Group (ISG).

Breaking down each company-defined segment, the Power Solutions Group (PSG) focuses on a bevy of products including analog, SiC, Discrete, MOSFET, power module, isolation, memory, gate driver, standard logic, and WBG products.

The variety of products offered via the Power Solutions Group performs multiple application functions, including voltage regulation, power switching, signal amplification, power conversion, signal conditioning, and circuit protection functions.

Shifting into the Advanced Solutions Group (ASG), the segment focuses on the design and development of mixed-signal, analog, advanced logic, ASSPs, ASICs, and integrated power solutions that are applicable to a multitude of end markets.

Digging deep, ASG product solutions empower “industry-leading active mode and standby mode” by improving efficiency in order to meet the requirements of regulatory agencies globally.

Furthermore, the segment also provides government clients with foundry and design services by utilizing Onsemi’s silicon technology, packaging, manufacturing, and IC design products to deliver high-end solutions to clients.

Last but not least, the Intelligent Sensing Group (ISG) segment focuses on designing and developing image signal processors, single-photon detectors, CMOS image sensors, and actuator drivers that service a bevy of end markets.

Continuing on the topic of the ISG segment, the group's products provide clients with “excellent pixel performance, sensor functionality, and camera systems capabilities” that can be applied to a vast array of product use cases including AI-powered applications.

Overall, future product development is focused on vehicle electrification, advancing the sustainable energy industry, magnifying automotive mobility, and empowering automation and data exchange.

Moving away from the business structure, Onsemi is led by Hassane El-Khoury, elected CEO and President of the company in December of 2020. El-Khoury previously led Cypress Semiconductor as CEO and President up until its acquisition.

Behind El-Khoury is a strong management team boasting previous experience from Cypress Semiconductor, Infineon, Intel, Fairchild Semiconductor, Aveva, and IBM.

Crunching the numbers, Onsemi beat Q3 earnings expectations delivering an EPS of $1.45 and revenue of $2.19 billion compared to estimates of $1.31 and $2.12 billion respectively.

Onsemi’s $2.19 billion quarter represented growth of 25.86% year-over-year and 5% quarter-over-quarter. For reference, Onsemi’s Q3 21’ revenue was $1.742 billion.

Separating Q3 revenue by segment, PSG revenue totaled $1.116 billion, while ASG and ISG revenues totaled $734.3 million and $342.2 million respectively. Furthermore, on a year-over-year basis, PSG, ASG, and ISG expanded by 25%, 20%, and 45%.

On a sequential basis, PSG, ASG, and ISG revenues in Q3 expanded by 6%, 2%, and 10% respectively.

Analyzing Onsemi’s revenue track record, the company has seen eight consecutive quarters with year-over-year revenue growth and nine consecutive quarters with quarter-over-quarter revenue growth.

See below for Onsemi revenue by quarter.

2020 (In Billions)

Q1: $1.2779 B

Q2: $1.2135 B

Q3: $1.3173 B

Q4: $1.4463 B

2021

Q1: $1.4817 B

Q2: $1.6699 B

Q3: $1.7421 B

Q4: $1.8461 B

2022

Q1: $1.9450 B

Q2: $2.0850 B

Q3 $2.1926 B

See below for Onsemi's revenue growth by quarter.

2020 (YoY % Change)

Q1: -7.84

Q2: -9.96

Q3: -4.67

Q4: 3.17

2021

Q1: 15.95

Q2: 37.61

Q3: 32.25

Q4: 27.64

2022

Q1: 31.27

Q2: 24.86

Q3: 25.86

Shifting away from revenue and into gross profit, the company delivered $1.0583 billion in quarterly gross profit, representing a strong improvement over the same time 2021 gross profit of $720.8 million.

Furthermore, Onsemi has maintained a strong track record of expanding gross profit, growing gross profit quarter-over-quarter for nine consecutive quarters. Below, you can find Onsemi’s gross profit track record.

Gross Profit By Quarter

2020

Q1: $402.7 Million

Q2: $387.3 Million

Q3: $441.2 Million

Q4: $497.6 Million

2021

Q1: $521.2 Million

Q2: $640.1 Million

Q3: $720.8 Million

Q4: $832.2 Million

2022

Q1: $961.3 Million

Q2: $1.0371 Billion

Q3: $1.0583 Billion

Alongside gross profit, gross profit margin improved strongly in Q3, landing at 48.27% compared to the same time 2021 level of 41.38%, representing an improvement of 6.89 percentage points.

Although, it is important to note that gross profit margin declined quarter to quarter from the record Q2 2022 level of 49.74%.

In relation to the 40 basis point drop in margins quarter-over-quarter, leadership attributed the decline to “accelerating ramp in silicon carbide and lower factory utilization,” in their third-quarter earnings call.

Moreover, gross profit margin has maintained a strong track record of improvement since 2020, expanding from margins of 31.51% in Q1 of 2020 to 48.27% in Q3 of 2022.

Below is a breakdown of Onsemi's gross profit margin by quarter since 2020.

2020

Q1: 31.51%

Q2: 31.92%

Q3: 33.49%

Q4: 34.41%

2021

Q1: 35.18%

Q2: 38.33%

Q3: 41.38%

Q4: 45.08%

2022

Q1: 49.42%

Q2: 49.74%

Q3: 48.27%

While on the topic of gross margin, operating margin on a GAAP basis declined year-over-year from 22.9% to 19.4% in Q3. Furthermore, operating margin declined quarter-over-quarter from a Q2 level of 28%.

Although it is important to note that on a non-GAAP basis operating margin achieved a record 35.4%, representing an 1100 basis point increase year-over-year and 90 basis points quarter-over-quarter.

Transitioning into Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), Onsemi reported a Q3 2022 EBITDA of $865.7 million, representing an improvement over the same time 2021 EBITDA of $547.4 million.

Digging deeper, EBITDA improved quarter-over-quarter from a Q2 2022 level of $835.3 million, extending Onsemi’s strong EBITDA track record.

Coupled with EBITDA, EBITDA margin landed at 39.48% in Q3, representing a decline quarter-over-quarter from 40.06%, but improved year-on-year from the same time 2021 level of 31.42%.

Below is Onsemi’s EBITDA track record by quarter since 2020.

2020

Q1: $212.6 Million

Q2: $227.5 Million

Q3: $284.2 Million

Q4: $332.1 Million

2021

Q1: $324.7 Million

Q2: $452.8 Million

Q3: $547.4 Million

Q4: $656.8 Million

2022

Q1: $791.3 Million

Q2: $835.3 Million

Q3: $865.7 Million

Traversing further into Onsemi’s financials, the company reported a Q3 net income of $311.9 million, representing a muted improvement over the same time 2021 level of $309.7 million.

In addition, net income declined quarter-on-quarter from $455.8 million to $311.9 million, representing a $143.9 million decline.

Investigating cash flow, free cash flow totaled $709 million in Q3, representing a sizable improvement over the same time 2021 level of $337 million and 2Q level of $171.3 million.

Below is Onsemi’s free cash flow by quarter since 2020.

2020

Q1: $33.7 Million

Q2: $81.2 Million

Q3: $101.8 Million

Q4: 184.0 Million

2021

Q1: $141.1 Million

Q2: $380.8 Million

Q3: $337.0 Million

Q4: $431.1 Million

2022

Q1: $304.8 Million

Q2: $171.3 Million

Q3: $709.0 Million

Shifting away from the income statement and into the balance sheet, Onsemi has maintained a well-balanced book.

Total Assets: $11.1007 Billion

Total Liabilities: $5.4241 Billion

Long-Term Debt: $3.0465 Billion

Cash & Cash Equivalents: $2.4502 Billion

Breaking down the balance sheet, management has done a solid job maintaining a healthy book, with total assets consistently outpacing liabilities and cash steadily growing since 2020.

Shifting into key company actions throughout the last few quarters, Onsemi has maintained its focus on reducing CapEx, stabilizing product mix, and expanding on key megatrends such as Silicon Carbide.

Speaking of costs, it is only right to expand on leadership's push to reduce CapEx and steady the ship by executing their “fab-lighter strategy”, exiting four fabs and reducing annual fixed costs by a whopping $160 million.

Furthermore, the company exited $277 million in business to eliminate price sensitivity within its product mix and to continue management's focus on improving business predictability and volatility.

Rotating into the company’s key expansion into Silicon Carbide, CEO Hassane El-Koury was upbeat on the Q3 earnings call.

“Our progress to our silicon carbide leadership is accelerating. As compared to our exit rate in Q4 of '21, we tripled our silicon carbide revenue in the third quarter and we continue to install capacity across the entire supply chain. We just passed the 1-year mark since acquiring GTAT, and we remain on track to expand our growth capacity by 5x year-over-year exiting 2022,” El-Koury noted.

For background, Onsemi acquired GT Advanced Technologies (GTAT) in 2021 for $415 million in order to accelerate the company’s silicon carbide push.

In 2021, CEO Hassane El-Koury was upbeat about the deal.

“As we move to a carbon free economy, SiC technology is a key driver to enable zero emissions in high efficiency electric vehicles, renewable energy and charging infrastructure. By integrating GTAT, onsemi can now provide end-to-end power solutions from SiC crystal growth to fully integrated intelligent power modules,” El-Koury said.

As for management effectiveness, Onsemi has been able to reinvest earnings more efficiently than 85% of its semiconductor industry competition with a return on assets of 17.22%, return on equity of 35.25%, and return on invested capital of 20.55% as of Q3.

Digging into the multiples, Onsemi trades at a premium but has grown cheaper since early 2021.

Price to Sales (LTM): 3.4x

EV to Sales (LTM): 3.6x

EV to EBITDA(LTM): 9x

Price to Earnings(LTM): 16.7x

Price to Book (LTM): 4.9x

Moving away from multiples and into institutional holdings, as of the latest data, there are 1636 institutional owners of which 1587 are long only. Top holders include Allianz Global Investors, Artisan Partners Limited, BlackRock Institutional Trust, Fidelity Management & Research, and Geode Capital Management.

Onsemi is also held by 236 ETFs, totaling 82.07 million shares and $5.0335 billion. In total, 18.15% of Onsemi is owned by exchange-traded funds.

On the analyst front, Onsemi currently sits with four strong buy ratings, 17 buy ratings, nine hold ratings, and zero sell ratings. Furthermore, the high price target sits at $83/share, while the low rests at $55/share, putting the average price target at $73.99/share.

On a technical basis, Onsemi has shown clear resilience against a volatile bear market, only declining 8.4% year to date compared to that of a 20.17% decline in the S&P 500.

Furthermore, Onsemi remains above its weekly 200 and 100 simple moving averages, while both weekly and daily MACD as of the latest updates remained in a negative trajectory.

Summarizing sentiment, the bulls argue Onsemi is a clear winner given the company’s exposure to key megatrends such as clean energy infrastructure and electric vehicles.

On the flip side, bears argue that demand will fall off even in key megatrend areas in the case of global recession all the while the semiconductor industry itself has been struggling to catch a footing since the 2020 pandemic shocked the supply chain.

In short, Onsemi (ON) is a unique semiconductor company with focused management, an interesting product mix with broad megatrend exposure, and solid financials to back itself up.

EAT - SLEEP - PROFIT

Disclaimer: This is not financial advice, simply the opinion of Luke Donay, Running With The Money, and Donay Capital. Nothing in this article is to be taken as financial advice.