1 Growth Stock Down 24% to Buy Right Now

Key Points

• ON Semiconductor appears to have passed the trough point in its revenue.

• As revenue grows again, so should its capacity utilization rate and margins.

• Its long-term end markets are very attractive, and recovery seems likely.

• 10 stocks we like better than ON Semiconductor ›

ON Semiconductor (NASDAQ: ON) is a specialty chipmaker, mostly for the automotive and industrial sectors, which have been under pressure. So the stock's recent 24% decline is understandable from a near-term trading perspective.

However, if you take a longer-term view, there's a strong case for arguing that this is a great time to buy shares of ON Semiconductor (also known as Onsemi). Its end markets are likely to improve over time, and management is doing a good job of preparing the company for future growth while optimizing current performance.

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It all comes together to make ON Semiconductor a compelling buy for patient investors.

Image source: Getty Images.

Onsemi is a growth stock trading as a value stock

Just as it makes sense only to buy a value stock when it has good growth prospects, it follows that it's a great idea to buy a growth stock when it's a good value. Still, don't take my word for it, because Wall Street analysts have ON Semiconductor generating $2.29 in earnings per share, putting it on just over 21 times 2025 earnings. While that might seem high, consider that analysts are forecasting this to be a trough year for the company, with earnings expected to grow 29% in 2026.

Furthermore, ON Semiconductor is a highly cash-generative company with CFO Thad Trent telling investors, "Our year-to-date free cash flow is 19% of revenue, and we remain on track to deliver 25% free cash flow margin for the full year." Given that the analyst consensus for revenue is almost $6 billion in 2025, it implies nearly $1.5 billion in free cash flow (FCF).

With a market capitalization of just $19.5 billion, this means the company is trading at only 13 times its FCF in 2025, a year likely to prove a trough year for the company.

Why is the stock so cheap?

The reason the valuation is so low is due to the near-term deterioration in its end markets. Management has made the conscious decision to focus its intelligent power and sensing solutions on the automotive (notably electric vehicles) and industrial end markets.

Unfortunately, as shown in the chart below, these end markets have experienced significant slowdowns over the past couple of years. It comes down to a combination of a retraction in heavy investment in EVs (which many automakers brought forward during the lockdown periods) and a slowdown in the industrial sector.

Data source: ON Semiconductor. Chart by author.

With interest rates still relatively high, making the cost of buying a car relatively high, and the forthcoming removal of federal tax credits for EVs at the end of September, a major recovery in EV investment may not come anytime soon. In addition, according to data from the Institute for Supply Management, the U.S. manufacturing sector continued to contract in August for the sixth straight month.

So why is the stock a buy? I have three reasons.

A bottom forming

As CEO Hassane El-Khoury noted on the last earnings call, "We are seeing signs of stabilization across our end markets." That's backed up by the sequential improvement in its industrial revenue -- partly driven by a doubling in its AI data center-based revenue. As previously noted, the fact that Onsemi is partnering with Nvidia for the next generation of data centers appears to be lost on the market.

Moreover, El-Khoury predicts that automotive revenue will grow sequentially in the third quarter, and it looks like the first quarter marked a low point in its revenue.

Continued actions to strengthen the business

Management continues to take advantage of opportunities to strengthen the business over the long term, and some of these actions are making its near-term financial results appear weaker. For example, it continues to rationalize its portfolio by exiting non-core businesses -- as such, 5% of its revenue in 2025 won't "repeat" in 2026.

While that revenue isn't likely to be higher margin over the long term, management disclosed that losing it is dilutive to its overall margin right now, because businesses like its silicon carbide chips (mainly for EVs) are lower margin now due to a lack of demand causing relatively low capacity utilization. This implies that, as the EV market eventually recovers, ON Semiconductor's margins will increase significantly.

Image source: Getty Images.

Attractive long-term markets

Finally, ON Semiconductor's end markets will likely improve, not least as they are driven by powerful secular drivers such as the energy transition (electric vehicles, charging networks, automated driving, etc.), as well as smart industrial factories and buildings. Additionally, its rapidly growing AI data center business is making a significant contribution to growth.

While the potential for near-term disappointment remains, the valuation and long-term growth prospects make this stock a compelling addition to a growth investor's portfolio.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends ON Semiconductor. The Motley Fool has a disclosure policy.