Onsemi’s August Pullback Is a Signal to Buy for Tech Investors

Key Points

• Onsemi's FQ2 results left something to be desired but confirm the bottom is in for this business.
• The stock price pullback aligned with a bottoming pattern: the discount is unlikely to last long.
• Analysts and institutional trends align with a robust rebound for this stock. 

Onsemi’s NASDAQ: ON FQ2 results left something to be desired, but do not alter the long-term outlook. The results include sequential growth and a forecast for it to continue, a signal that the bottom of the business contraction has been seen and the recovery is underway.

While it may take time for the recovery to gain momentum, Onsemi is well-positioned for long-term growth due to its focus on SiC microchip technology, critical to numerous industries including EV/AV, drones, and the Internet of Things.

The takeaway for investors is that the July price pullback aligns with a market bottom, and the discount is unlikely to linger. 

Onsemi Provides Favorable Guidance for Q3

Onsemi did not have a blowout quarter, with revenue contracting by 15.5% year-over-year (YOY). However, the $1.47 billion in revenue is slightly better than expected and up sequentially, with the YOY contraction slowing sequentially and compared to last year.

Improvement was seen in all segments, led by Power Solutions Group (PSG), which returned to growth, expanding by 2% YOY. The Analog and Mixed-Signal Group (AMG) and Intelligent Sensing Group (ISG) segments remain in contraction, but business is improving with AMG down only 2% YOY and the 8% contraction in ISG about half the pace of previous quarters. 

Margin news is a sticking point for investors in August. The company’s margins contracted significantly due to business deleveraging, but the news is not all bad.

The critical takeaway is that the company continues to generate sufficient cash flow and free cash flow (FCF) to sustain its turnaround, financial health, and capital returns while the business turnaround and industry rebound gain momentum.

The net result for Q2 is $106.1 million in free cash flow and $0.53 in adjusted earnings, as expected, compared to the modest strength seen in the revenue comparison. 

The guidance provides the good news and explains why the stock price is expected to rebound later this quarter. The company is not expecting a robust improvement but is guiding for sequential growth, another slowdown in the YOY contraction, and may be cautious in its estimates, forecasting revenue and earnings slightly above the consensus. 

Capital Return Helps Support the Onsemi Share Price in 2025

Onsemi’s capital return consists entirely of share repurchases, which are robust, reducing the count by more than 4% YOY in Q2 and are expected to continue. The company’s cash flow is reduced compared to prior years, but it continues to improve as the year progresses and into next year. It is improving sequentially in 2025 and is forecasted to continue improving in the next fiscal year. 

Until then, the cash flow is sufficient to sustain the balance sheet health, which includes ample cash and low leverage. The company’s long-term debt is only $3.3 billion, less than 0.5x the equity and about 1.35x the cash.

Institutions show high confidence in Onsemi’s ability to continue buying back shares. After selling on balance in Q1, the group, which owns more than 97% of the stock, reverted to buying on balance in Q2 and continued the trend in Q3.

With this in place, it is unlikely that Onsemi stock will hit a new low and more likely that it will continue moving sideways within its newly established range, if not complete a reversal and begin moving higher. 

Analysts' sentiment trends also align with a bottom for Onsemi’s stock price. Although sentiment and the consensus price target have moderated from earlier in the year, the 24 tracked by MarketBeat continue to rate it as a Hold with bullish bias, and recent price target revisions are upward.

They have put the bottom in the consensus, lifting it marginally since the start of summer, and put the stock at fair value with a chance of rising 15% to 35% by year’s end.