To The Moon

Before the US market opened yesterday, $ON Semiconductor(ON)$ , the automotive chip leader, released its fourth-quarter earnings report, slightly exceeding expectations:

As a result, ON Semiconductor's stock price soared by 10%, reversing its downward trend:

Despite the strong reaction in the stock price, ON Semiconductor's earnings guidance remains weak. The surge behind it may be that the market's pessimism has been released in the previous decline, coupled with the valuation being at a low level and the capacity utilization rate expected to hit a trough. The long-term prospects of ON Semiconductor are still appealing!

Specifically, ON Semiconductor's revenue was $2.018 billion for the fourth quarter, which was at the upper limit of the management′s guidance of $1.95-2.05 billion, and slightly higher than analysts' expectations of $2.0 billion, with a year-on-year decline of 4.1%:

By segments, revenue from automotive chips was $1.114 billion in fourth-quarter, exceeding analysts′ estimates of $1.09 billion and growing 12.7% year-on-year. Industrial market revenue was $497 million, down 10% year over year, missed analyst expectations of $560 million. Other market revenue was $407 million, down 27.7% year over year, but significantly exceeding analyst expectations of $354 million:

The weak performance of all segments is within market expectations. ON Semiconductor had already emphasized the risks in its third-quarter report, and from the actual results, the automotive chip exceeded expectations and did not collapse as the market had feared. It also performed much better than competitors. The only thing that fell short of expectations was the industrial market, but this business is not the focus of investors.

The spotlight of the market is still on automotive chip. After the outbreak of the pandemic, the new energy vehicle market exploded, and ON Semiconductor's automotive chip revenue has grown from around $450 million to the current $1.1 billion. Considering that the trend of electrification is still in its early stages, there is still tremendous growth potential for automotive chip.

Especially ON Semiconductor's silicon carbide business. Silicon carbide is a third-generation semiconductor material that offers performance advantages such as a wider bandgap, higher thermal conductivity, higher breakdown electric field, and higher electron migration rate compared to first- and second-generation semiconductor materials.

These advantages translate into lower conduction losses, improved efficiency, simplified cooling, reduced size, and fewer peripheral components, thus reducing other costs. Therefore, silicon carbide devices have important applications in downstream industries, including new energy vehicles, photovoltaics, rail transportation, energy storage, and more.

In 2023, ON Semiconductor's silicon carbide shipments exceeded $800 million, quadruple that of 2022, achieving the highest growth in the industry and expected to capture a 25% market share!

Management expects the silicon carbide market to grow by 20%-30% in 2024, and ON Semiconductor's growth rate is expected to be twice that of the industry!

Focusing on automotive chip and transitioning to silicon carbide has significantly boosted ON Semiconductor's profitability. The gross margin for the fourth quarter of last year reached 46.7%, far exceeding pre-pandemic levels:

According to ON Semiconductor's long-term guidance, the company expects its gross margin to increase from 47% in 2023 to 53% by 2027, taking its profitability to a new level!

The rising profitability has significantly boosted the company's valuation. The current price-to-book ratio is 4.3 times, much higher than the pre-pandemic valuation of 3 times but still room for improvement compared to the valuation of around 6 times in 2022!

The low valuation and the unexpected growth in the automotive chip market have driven up the stock price of ON Semiconductor after the earnings report. But looking ahead to the first quarter of this year, the company's revenue guidance is $1.8−1.9 billion, less than analysts expected $1.93 billion. The gross margin is expected to be 44.5%-46.5%, while analysts estimate it to be 45.6%, which is in line with expectations.

During the earnings conference call, management did not give an optimistic forecast. Automotive chip customers are still working to reduce inventory, and demand has slipped due to macroeconomic headwinds. Currently, ON Semiconductor's inventory is still high.

But the entire semiconductor industry is filled with optimism. Yesterday, the Semiconductor Industry Association (SIA) released a report stating that global semiconductor industry sales fell 8.2% year-on-year in 2023. However, with the semiconductor market picking up in the second half of last year, this figure is expected to rebound by double digits in 2024.

Although ON Semiconductor's fundamentals are still weak, perhaps this is a rare cycle trough, and the former automotive chip king will eventually return!