ON Semiconductor: Powering Electric Vehicles and Automation with Next-Level SiC

Investment Thesis

TradingKey - ON Semiconductor (NASDAQ: ON), a leading supplier of semiconductor components for electric vehicles, renewable energy, and AI data centers, saw Q1 2025 revenue drop due to market softness but maintained a robust adjusted gross margin and strong free cash flow. Strategic acquisitions bolster its automotive and industrial offerings, with management targeting 10–12% annual revenue growth through 2027, fueled by China’s EV market recovery and a growing SiC.

DCF values the stock at $64–$75 per share, reflecting expected margin expansion and cash flow growth. ON Semiconductor’s disciplined capital management and strong position in electrification and industrial markets make it an attractive investment.

Source: TradingKey

Financials — Quarterly Highlights (Q1 2025)

· Revenue: Q1 declined 22% YoY to $1.45 billion. Q2 guidance is between $1.4 billion and $1.5 billion.

· Margins: GAAP gross margin was 20.3%, impacted by restructuring and market softness. Adjusted non-GAAP gross margin stood at 40.0%, above recent downturn levels. Q2 margin guidance is 36.5%–38.5%.

· EPS: Q1 diluted EPS was $0.55 on a non-GAAP basis. The consensus estimate for Q2 EPS is approximately $0.48.

· Cash Flow: Free cash flow represented 31% of revenue in Q1, a 72% increase YoY. Approximately 66% of Q1 free cash flow was returned to shareholders through share buybacks.

· Debt and Balance Sheet: Total liabilities stand near $3.4 billion against assets of $12.3 billion, reflecting moderate leverage. The company maintains stable liquidity with net positive operating cash flow of $50 million in Q1.

· Capex: Capex in Q1 was about $148 million, roughly 25% of operating cash flow, with full-year 2025 guidance near 5% of revenue, focusing on capacity expansion in SiC and other growth areas.

· Manufacturing: Facility utilization is around 60%, with ongoing efforts to optimize inventory and manufacturing footprint to protect margins amid market cyclicality.

Company Overview

ON Semiconductor, which separated from Motorola in 1999, is now a global leader in power management and sensor solutions based in Scottsdale, Arizona. Its products include power semiconductors, analog and mixed-signal ICs, and advanced sensors. The company focuses on fast-growing industries such as automotive, industrial, and AI infrastructure, especially on energy-efficient technologies like silicon carbide (SiC), which improve efficiency in EV powertrains, solar inverters, and data centers.

ON Semiconductor’s hybrid manufacturing model blends in-house production with foundry partnerships. It runs 37 facilities worldwide to keep costs low and strengthen its supply chain. Its sales strategy combines direct engagement with major OEMs, like automotive manufacturers, and a global distributor network to reach smaller clients.

Competitor Analysis

ON Semiconductor operates in a fast-evolving semiconductor market with key end-markets spanning automotive, industrial, and AI infrastructure. The company’s SiC solutions for EVs are a cornerstone of its strategy, aligning it closely with leading SiC players such as Infineon and STMicroelectronics. While Texas Instruments dominates broader automotive semiconductor segments, ON Semiconductor’s SiC focus targets the rapidly growing EV power electronics market, enabling longer driving ranges and faster charging times. This market is projected to grow at a ~30% CAGR through 2030.

ON Semiconductor operates in a rapidly changing semiconductor industry, focusing on key markets like automotive, industrial, and AI infrastructure. Its SiC technology for EVs is central to its strategy, putting it alongside leading players like Infineon and STMicroelectronics. Unlike Texas Instruments, which leads broader automotive chips, ON Semiconductor targets the fast-growing EV power electronics market, helping cars achieve longer ranges and faster charging. This market is expected to grow about 30% CAGR through 2030.

In industrial sectors such as renewable energy and factory automation, ON Semiconductor competes with companies like Analog Devices and NXP by leveraging strengths in sensors and power management, despite recent weak demand. In AI infrastructure, the company provides power solutions that improve data center energy efficiency, supplementing NVIDIA and Broadcom.

*Market share percentages are estimates reflecting combined wafer and device revenues.

ON Semiconductor’s early and consistent investments in SiC together with strong OEM partnerships gives it a strong advantage. However, its revenue shows moderate customer concentration, with roughly 30–40% tied to a few key clients such as Volkswagen Group, General Motors, and leading Chinese EV manufacturers such as BYD and NIO. Lower-cost Chinese manufacturers are increasing competition and putting pressure on prices.

Revenue Breakdown

ON Semiconductor generates revenue primarily from three core segments focused on power and sensor solutions.

Power Solutions Group (PSG), 48% of total revenue, centers on SiC and MOSFET technologies used in EVs, renewable energy, and data centers. 26.2% YoY decline in Q1 2025, mainly due to automotive inventory adjustments.

Analog & Mixed-Signal Group (AMG) contributes 35% of total revenue and supplies analog and mixed-signal integrated circuits for automotive and industrial uses, but saw a 18.7% drop due to weak demand in industrial markets.

Intelligent Sensing Group (ISG) accounts for the remaining 13.8%, focusing on sensors and connectivity for the Internet of Things (IoT) and factory automation. This segment declined 19.7% but could be stabilizing as IoT adoption grows.

Source: ON Semiconductor, TradingKey

Additionally, AI and data center revenues, currently not segmented separately, are expanding rapidly, doubling YoY, driven by growing demand for advanced power management and sensing.

Asia-Pacific remains a key growth engine. US contributes about 12.4% of total revenue, HK 23.1% (likely includes substantial sales ultimately serving China mainland market), Singapore 30.6%, and UK 14.3%.

Source: ON Semiconductor, TradingKey

Growth Potential

ON Semiconductor’s growth is driven by key secular trends in electrification, renewable energy, and AI. Its strong position in SiC gives it a solid chance to capture a sizeable share of the rapidly expanding SiC market.

ON Semiconductor is expanding through acquisitions. If approved, its $6.9 billion purchase of Allegro MicroSystems will boost its sensor and power management products in cars and industry. The recent $115 million acquisition of Qorvo’s SiC JFET business strengthens its offerings for AI data centers and renewable energy systems.

A rebound in China’s car market is expected in late 2025, which should help ON Semiconductor grow, especially with new products aimed at Chinese EV makers. The company’s management expects revenue to grow about 10–12% per year and aims to improve profit margins through 2027.

Valuation

Using a discounted cash flow (DCF) model, ON Semiconductor’s fair value is estimated between $64 and $75 per share. This range reflects improving free cash flow, margin expansion, and growth in key SiC and AI markets. Additionally, management has made it clear that it plans to increase the stock repurchase quota to 100% of free cash flow in 2025, that is, all free cash flow will be used for stock repurchases, which will help support the enhancement of shareholder value.

Risks

· Intense competition, especially from Chinese firms, puts pressure on prices and margins.

· Supply chain disruptions and geopolitical tensions could impact production.

· Rapid technological changes demand continuous innovation to stay competitive.

· Industry shifts toward fabless manufacturing pressures ON Semiconductor’s IDM model.