Despite what was anticipated to be a tough second-quarter 2023, Onsemi (ON 2.53%) sailed through all expectations in its last quarter. Revenue increased less than 1%, so it appeared to be a lackluster performance. But under the surface, this chipmaker is emerging as an important player in the global automotive industry. Sales to automakers jumped 35% year over year in the last quarter, driven especially by demand for electric vehicle (EV) semiconductors.
Onsemi stock has been off to the races in 2023, but is the stock still a buy?
Onsemi's big bet on automotive
First, about the year-over-year flat revenue, which clocked in at $2.09 billion for Q2. A couple of years ago, CEO Hassane El-Khoury and CFO Thad Trent were brought in to refocus Onsemi not just on growth, but profitable growth. That has meant exiting non-core and lower-margin chip manufacturing. El-Khoury explained on the earnings call that another $57 million in business was sunsetted in Q2, bringing the total value of business closeouts to $100 million for 2023 and $400 million since the business transformation began in 2021.
In other words, when adding back the strategically closed business segments, Onsemi would have grown revenue 3% versus last year. That's still not exceptional growth, but consider the fact that Onsemi and its peers are in the midst of a transition period with its customers in industrial and manufacturing sectors of the economy. Onsemi is outperforming, especially its biggest rival Texas Instruments.
But what is Onsemi doing after it closes down chipmaking lines it deems non-core to its long-term vision? It's transitioning to automotive and industrial power-management chips -- silicon carbide in particular. Auto-specific revenue increased 35% from a year ago and surpassed $1 billion in quarterly sales for the first time, representing over half of revenue. Auto (especially EVs) and industrial chips (which include solar power and power-grid infrastructure) combined to represent over 80% of total revenue, with other small pockets of weakness (consumer electronics) offsetting core growth.
And as for silicon carbide specifically, Onsemi continues to change out some of its existing manufacturing lines for this next-gen power-chip technology. Onsemi remains on pace to generate at least $1 billion in silicon carbide sales this year, with over half of those wafers made in-house. Onsemi, STMicroelectronics, and Wolfspeed are the three emergent leaders in silicon carbide, but Onsemi appears to be pulling ahead in one key area.
The metric that matters most
Here's what's really interesting about Onsemi's pivot to auto and industrial, especially in the silicon carbide department: It's doing so in a highly profitable fashion. Operating margins are steadily on the rise and are now well above 30%, including 32.2% in Q2 (up from 28.8% last year). This makes it a best-in-class performer in silicon carbide chips versus STMicroelectronics and Wolfspeed.
Data by YCharts.
As a result, earnings per share (EPS) rose 26% year over year to $1.29, and the outlook for Q3 implies as much as a 93% year-over-year increase. On an adjusted basis, EPS is trending toward flat to slightly down from 2022 due to restructuring charges. Nevertheless, even in a year when retooling its existing fabs for silicon carbide is underway, this company is boosting its ability to generate cash now and in the decade ahead.
Management is even now starting to send some of this cash back to shareholders. Stock repurchases have totaled $164 million so far in 2023, nearly double what they were the same time last year.
After the earning report, Onsemi trades for just under 24 times trailing-12-month EPS but just 18 times expected 2024 EPS. If you believe this auto, EV, and industrial power chip supplier can continue growing its earnings at a low- to mid-teens percentage in the coming years, it still looks like a solid buy for the long term.
