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OnSemi is On Point

Governments have laid out the long-term plan for investors. Battling climate change, whether it is a Western democracy or China’s grand strategy, is a top priority.

On Semiconductor positioned itself to take advantage of these long-term trends. The company made structural changes to its business model and sits in an advantageous position to take advantage of investment trends.

It is already seeing returns from its strategy. The stock has weathered aggressive selling in the tech space and is set up to be a market leader in the next leg higher. 

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This is a name that deserves an in-depth look. 

On Semiconductor has implemented structural changes to focus on the megatrends of vehicle electrification, ADAS, energy infrastructure and factory automation. These are key areas that will continue to see growth over the next decade as governments commit to reducing their carbon footprints. 

Onsemi is exiting volatile markets and highly competitive noncore business to focus on profitable growth.  It is deftly handling this transition. Margin improvement is the big story.

In 2021, revenues increased 28% while operating income and free cash flow increased approximately 6x faster, demonstrating the operating leverage in the new model. The automotive business increased 36% year-over-year and industrial revenue increased 33% as ON continues to see content gains in each segment driven by automation, electrification, and advanced safety.

Q4 revenue increased 28% year-over-year and 6% quarter-over-quarter. The sequential increase in revenue was driven by units shipped increasing 5.7% sequentially and a favorable pricing mix in its end markets. This highlights an improving supply chain and pricing power due to strong demand for its products. Revenue for Intelligent Power and Intelligent Sensing were at record highs.

The company continues to see strong demand for its product. Its design funnel grew over 60% year-over-year, and its new product revenue grew 28% in 2021. 


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Gross Margins improved 770 basis points in 2021 to 40.4%. ON exited the year with Q4 margins exceeding their 45% long-term target. The company has improved GM by 1080 basis points since embarking on its structural changes. ON raised its 2025 targeted gross margins to 48-50% from the 45% it projected a few months back at its Investor Day.  It reiterated it expected Operating Expenses to grow 17% and raised its operating income forecast to 31-33% from 26-28%.

The company met its margin targets well ahead of schedule. It noted that it has headroom to further expand margins in the coming years. This is important as investors transition searches for earnings power over growth.

Design win performance, along with long-term supply agreements have positioned the company for sustainable long-term growth. ON stated that its interaction with customers suggest inventory throughout the supply chain remains low and lead times for the industry are stretched. This pipeline and inventory commentary bolsters investor confidence in its guidance.

The company saw an increase of approximately $600 million in committed revenue for its silicon carbide products, bringing committed revenue to over $2.6 billion though 2024. ON expects its renewable energy revenue to grow by over 50% in 2022. Alternative energy will be a long-term driver of growth. It is seeing accelerating demand for its imaging products and factory automation. Industrial customers are investing in automation at an increased pace to improve efficiency and to reduce volatility in operations due to wage inflation and labor shortages, onshoring and social distancing mandates. 

The original plan happened faster than both the company and investors expected. The strong demand environment allowed the company to transition ahead of expectations. ON will continue to divest in older businesses and see increased costs as it drives capacity expansion to meet demand. But it can absorb these cost increases through yield improvement and operational efficiencies.  

On Semis disruptive innovations will help solve the world’s most complex challenges and lead to creating a safer, cleaner, and smarter world. Its management team has done a great job at managing its transition. Investors looking for a solid tech company to invest in should consider putting some money into this hot name.

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