What happened
Shares of intelligent sensing and power solutions company ON Semiconductor (ON 2.53%) soared 51.6% in the first six months of 2023. It's a stunning performance that significantly outperformed the S&P 500's 15.9% rise over the same time frame. The move comes down to the stock climbing a wall of worry over technology stocks, specifically the semiconductor sector.
Going into the year, it was no secret that consumer discretionary spending was slowing. A combination of rising interest rates crimps consumers' ability and willingness to spend on items such as consumer electronics and smartphones.
At the same time, there's a natural correction in spending on consumer goods occurring after lockdowns and stay-at-home measures in previous years pulled forward spending on goods in the home. It all added up to create an uncertain environment for companies selling technology into the sector.
On Semi is one of those, and it has significant exposure to many affected end markets (such as laptops, graphics cards, gaming, white goods, and smartphones) in its "other" sales. Its "other" sales (a catchall description that lumps together its non-automotive and industrial sales) declined 39.3% in the first quarter to $418 million.
That said, On Semi's management sees its future in the automotive and industrial markets where its intelligent power and sensing solutions are positioned in markets with lots of secular growth potential, such as electric vehicles (EV), industrial automation, advanced driver assistance systems, EV charging infrastructure, robotics, smart buildings/cities. As such, there's much more to ON Semi than consumer electronics. Indeed, its automotive and industrial sales combined rose 22.6% to $1.54 billion in the first quarter 0 – more than offsetting the decline in "other" sales, resulting in a 1% revenue increase for the company in the first quarter.
In a nutshell, the market is warming to the idea that this will likely prove a trough year for the company, and its underlying sales growth will likely propel it to long-term growth.
Image source: Getty Images.
So what
While Wall Street still expects ON Semi's sales and earnings to decline in 2023, it's also pricing in a trough in its prospects. Moreover, the company's long-term growth prospects look assured. It's not only a consequence of the end market exposures discussed above; it's also the case that ON Semi's content per solution is likely to be higher on an EV rather than an internal combustion engine. It's a similar situation with a factory adopting automation or the growing use of EV charging networks.
Now what
If ON Semi hits Wall Street's estimates for EPS of $4.83 in 2023, it will trade on less than 20 times earnings. That's a reasonable valuation for a cyclical stock passing a trough year. The secular growth in many of its industrial and automotive end markets should still be in place next year, and a bounce in consumer electronics could lead to a strong sales recovery in 2024.
