onsemi Stock Dips After Earnings: Why the Dip Is Buyable

Key Points

• onsemi has passed through its business trough and is on the upswing, with acceleration ahead.
• Cash flow is strong, supporting a healthy capital return, with buybacks accelerating in Q1.
• Acceleration is forecast for Q2 and guidance is likely to be cautious.

onsemi’s NASDAQ: ON price action surged in April as signs of broad-based improvement in industrial semiconductor demand gripped the market. The move raises red flags, as its parabolic advance is unsustainable unless, of course, there are forces supporting it.

In this case, onsemi has numerous factors working in its favor, pointing not only to fresh highs but also to a sustainable, long-lasting uptrend that can add significant value to its share price.

While AI and datacenter demand underpin the outlook, the recovery is broad-based, with strengths in automotive, industrial, and Internet of Things (IoT) emerging. The critical takeaway is that data centers and AI underpin advances across all other areas, and AI is still in its earliest, most applicable phases. This suggests a multiyear cycle at worst. At best, onsemi and the industrial chip makers are looking at a decade-long or longer supercycle with potential for positive feedback loops to form. Advances are likely to come quickly as AI adoption gains traction, leading to increasingly short upgrade cycles.

onsemi Inflects to Growth, Acceleration Ahead

onsemi had a solid quarter with revenue growing by 4.1%, the first top-line advance in over two years. The take exceeded expectations by a slim margin, about 130 basis points, with strength centered in the PSG segment. It grew by 14%, underpinned by data center demand, which grew by 30% sequentially and more than 100% year over year (YOY). ISG also grew, but by a tepid 1%, with the AMG segment the sole weakness, declining by 5%. Looking ahead, onsemi expects data center revenue to remain strong, as demand is strong and its business is broad-based, spanning numerous vendors and multiple hyperscalers.

Margin was another area of strength. Operational improvements and reinvigorated revenue leverage led to better-than-expected margins, with the adjusted gross margin at 38.5% and operating income up by 10%. Adjusted earnings also outpaced consensus estimates, more than doubling the top-line strength, and are expected to improve in the upcoming quarter.

Guidance is a bullish catalyst for this stock. The company forecasted revenue and earnings with mid-points above MarketBeat’s reported consensus, expecting adjusted gross margin to improve by 50 bps sequentially. The 70-cent midpoint is 3 cents above the consensus and likely to be cautious, given the strengths seen in onsemi’s and other industrial chipmaker reports.

onsemi Accelerates Capital Return: Analysts and Institutions Buy it

onsemi’s share buyback raises a red flag, as it accelerated compared to last year and exceeded free cash flow for the quarter. However, it also signals managerial confidence in the company’s financial position, cash flow, and growth outlook, with a forecast of nearly 8% acceleration in the current quarter. Either way, the buyback is significant, having reduced the share count by 2% sequentially and nearly 6.5% YOY, and the balance sheet remains healthy.

Balance sheet details reflect the aggressive buyback, including reduced cash, assets, and equity, but liabilities are also falling; the company remains well-capitalized, and leverage is very low. Long-term debt is about 1.5X the cash position and less than 0.5X the equity, leaving onsemi in a flexible financial position able to continue executing its strategy.

Institutional and analyst trends show they support this market. Institutions own nearly 100% of the stock and have been accumulating on balance, setting the stage for the share price’s meteoric rise in April. Analysts, of which MarketBeat tracks 30, rate ON a consensus Hold, with a 45% Buy-side bias. The stock price action has outpaced the consensus price target as of early May, with positive trends continuing, including the initial analyst responses to the Q1 results and guidance update. One revision from Needham & Company LLC included a boosted price target of $110, well above the consensus price point.

onsemi Pulled Back After Reporting: Buy the Dip Indicated

onsemi’s stock price pulled back by 5% in after-hours trading following the report, indicating a near-term peak has been reached. As strong as the results were, the anticipated strength led to a sell-the-news event. With consensus still double-digits below the peak, it is possible the sell-off will deepen before a rebound forms. However, a rebound is likely, given the company’s inflection and capital return; it’s only a matter of how deep the stock price falls and how soon the bottom is reached. MACD convergence is also in play, strengthening the outlook for a rebound to fresh highs. The critical support levels are in the low $90’s.

The biggest risk is the valuation. onsemi trades at over 33X its current-year earnings, which prices in a robust outlook. Assuming that onsemi produces the expected growth, the 11X 2030 earnings at which the stock trades is a deep value, suggesting a 100% to 200% stock price upside could be possible.