IN semiconductors‘s (NASDAQ: ON) The 24.5% decline last year has left the long-term growth stock deep in value territory, as the market may have overreacted to weakness in its key end markets over the previous 18 months. There is a strong case for buying stocks on a dip, as the long-term case for stocks is compelling.
The semiconductor company makes smart power solutions and smart sensing technologies used in various industries. However, its two key end markets are industrial and automotive.
In the automotive sector, its energy solutions (particularly silicon carbide chips for electric vehicles) help automakers reduce vehicle weight and extend their range. Additionally, its intelligent sensing technologies help with imaging and sensing used in advanced driver assistance systems (ADAS).
Meanwhile, the long-term arguments for its industrial end markets are no less compelling. Smart sensors are a critical part of the digitalization of factories and buildings, helping them become “smart” as they create data that will be analyzed to iteratively improve real-time efficiency.
Both key end markets have great prospects. There is no doubt that electric vehicles and ADAS are the future of the automotive industry, and the productivity improvements created by industrial automation and software (including advanced AI analytics) will ensure that investment in smart factories and buildings connected will grow in the future.
Image source: Getty Images.
The chart below demonstrates the weakness in its end markets over the past 18 months. It has not been an easy environment. For example, in the manufacturing sector, the widely followed Institute for Supply Management Purchasing Managers’ Index (PMI) has been below 50 (a reading below 50 indicates a contraction in the manufacturing economy) every month. since November 2022, except for one month in March 2024. .
When it comes to automotive markets, it’s no secret that relatively high interest rates make auto loans more expensive and reduce vehicle sales and production. Additionally, it’s worth noting that many automakers boosted investment in electric vehicles during the pandemic, and that’s partly responsible for the flood of models on the market as high interest rates reduced demand.
The chill wind of the EV end-market slowdown first hit the company in the fall of 2023, when management was forced to reduce its full-year estimate for silicon carbide chips for the automotive sector in 2023 to $800 million from a previous estimate of $1 billion in customer account that reduces demand.
There was similar disappointment in 2024, when CEO Hassane El-Khoury told investors, “We expect our silicon carbide revenue to have low- to mid-single-digit growth during 2023” on an earnings conference call in October.
Data source: ON Semiconductor. Table by author.
Unfortunately, there is nothing the company can do about its end markets, interest rates, or spending cycle decisions in the industrial and EV world. Also, don’t expect a strong sales rebound anytime soon; El-Khoury’s comment in October gave no reason to expect it. “Over the last few quarters, we have been talking about an L-shaped recovery,” he said, adding: “The demand environment remains weak with inventory digestion ongoing and final demand sluggish. Our outlook for all markets remain unchanged as uncertainty persists among our customers.”
It’s good that El-Khoury is taking a cautious approach to guidance and commentary, as it prevents too much optimism from entering the stock.
That said, ON Semiconductor doesn’t need a strong growth rebound to be an exceptional value stock. It currently trades at 15.7 times Wall Street estimates of $4 earnings per share in 2024. Additionally, Wall Street’s expectations for 2025 appear modest, with just 4.2% revenue growth and 4.29 dollars of earnings per share (EPS), which puts it at 14.6 times. estimated earnings for 2025.
Image source: Getty Images.
These are undemanding valuations for a company whose best days are yet to come. The semiconductor market is notoriously cyclical and the current pause is causing fear among investors in the sector. Still, it’s more a question of when, not if, ON Semiconductor’s markets recover cyclically, and if 2024 turns out to be a dip in its earnings, then investors can expect significant returns from the stock in 2025.
If it stays at this valuation, then the stock will be worth holding forever, as the upside potential is significant.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends ON Semiconductor. The Motley Fool has a disclosure policy.
1 Magnificent Megatrend Stock Down 25% to Buy and Hold Forever was originally published by The Motley Fool
