1 Magnificent Megatrend Stock Down 25% to Buy and Hold Forever

ON Semiconductor's (NASDAQ: ON) 24.5% decline last year has left the long-term growth stock deep in value territory, as the market may have overreacted to the weakness in its key end markets during the previous 18 months. There's a strong case for buying the stock on a dip as the long-term case for the stock is compelling.

Meet ON Semiconductor, a smart growth stock

The semiconductor company makes intelligent power solutions and intelligent sensing technologies that are used across various industries. However, its two key end markets are industrial and automotive.

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In the automotive sector, its power solutions (notably silicon carbide chips for electric vehicles, or EVs) help automakers lower vehicle weight and extend the vehicle range. Moreover, its intelligent sensing technologies help with imaging and sensing used in advanced driver-assistance systems (ADAS).

Meanwhile, the long-term case for its industrial end markets is no less compelling. Intelligent sensors are a critical part of the digitization of factories and buildings, helping them become "smart" as they create data to be analyzed to improve efficiency in real time iteratively.

Both key end markets have great prospects. There's little doubt that EVs and ADAS are the future of the automotive industry, and the productivity improvements created by industrial automation and software (not least advanced AI analytics) will ensure that investment in smart connected factories and buildings grows in the future.

Image source: Getty Images.

What went wrong for ON Semiconductor in 2024?

The chart below demonstrates the weakness in its end markets over the last 18 months. It hasn't been an easy environment. For example, in the industrial sector, the widely followed Institute for Supply Management Purchasing Managers Index (PMI) has been below 50 (a reading below 50 indicates contraction in the manufacturing economy) every month since November 2022, aside from one month in March 2024.

Turning to the automotive markets, it's no secret that relatively high interest rates make car loans more expensive and curtail vehicle sales and production. Moreover, it's worth noting that many automakers pulled forward investment in EVs 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 slowing EV end market first hit the company in the autumn of 2023 when management was forced to lower its full-year estimate for silicon carbide chips to the automotive sector in 2023 to $800 million from a previous estimate of $1 billion on account of one customer cutting demand.

There was similar disappointment in 2024, with CEO Hassane El-Khoury telling investors, "We expect our silicon carbide revenue to be in the low- to mid-single-digit growth over 2023" on an earnings call in October.

Data source: ON Semiconductor. Chart by author.

A recovery will take time

Unfortunately, there's nothing the company can do about its end markets, interest rates, or spending cycle decisions in the industrial and EV worlds. Moreover, don't expect a sharp bounce back in sales soon; El-Khoury's commentary in October gave no reason to expect one. "Over the last several quarters, we've talked about an L-shaped recovery," he said, adding: "The demand environment remains muted with ongoing inventory digestion and slow end demand. Our outlook for all markets remains unchanged as uncertainty persists among our customers."

It's good that El-Khoury is taking a cautious approach to guidance and commentary, as it stops too much optimism from being baked into the stock.

Why ON Semiconductor is an excellent value stock for 2025

That said, ON Semiconductor doesn't need a sharp bounce-back in growth to be an outstanding value stock. It currently trades at 15.7 times Wall Street estimates for $4 in earnings per share in 2024. In addition, Wall Street's expectations for 2025 appear modest, with just 4.2% revenue growth and $4.29 in earnings per share (EPS), putting it at 14.6 times estimated 2025 earnings.

Image source: Getty Images.

These are undemanding valuations for a company whose best days lay ahead. The semiconductor market is notoriously cyclical, and the current lull is creating fear among investors in the sector. Still, it's more a question of when, not if, ON Semiconductor's markets cyclically recover, and if 2024 proves to be a trough in its earnings, then investors can expect significant returns on the stock in 2025.

If it stays on 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.