Shares of auto chip specialist On Semiconductor (ON 0.05%) plunged on Monday, falling 19.5% as of 12:44 p.m. ET.
The company reported earnings today, and while third-quarter figures came in ahead of analyst expectations, management guided for a soft fourth quarter that was well below estimates.
On has ridden the wave in power chips for electric vehicles (EVs) over the past two years, but it looks like that red-hot market is now cooling significantly.
NASDAQ: ON
Key Data Points
Auto and industrial markets are finally softening
On had thrived this year up until now, as both auto and industrial chip demand had remained resilient. Auto and industrial chips had been among those that were in the most short supply during the supply chain challenges of 2021, and demand had remained strong even through 2022. This is in contrast to other chip markets in PCs, phones, and cloud servers, which experienced a big hangover starting last year.
This summer, several reports emerged in the financial media noting electric vehicle sales were slowing down in a big way. There is likely a combination of factors behind that. The most prominent are likely higher interest rates, making cars more expensive, as well as possible market saturation among early EV adopters, with range anxiety and costs limiting mass adoption. Of note, electric vehicles tend to use many more semiconductors than internal combustion engines, so a slowing in EVs would disproportionally affect auto chipmakers. In fact, On CEO Hassane El-Khoury made the point that EVs have 14 times the chip content of an internal combustion engine car, just on the drivetrain alone.
On generates over half its revenue from auto-related chips, and unfortunately appears to have confirmed this EV slowdown today. While third-quarter revenue of $2.18 billion beat expectations of $2.15 billion, and adjusted (non-GAAP) earnings per share (EPS) of $1.39 beat expectations of $1.34, On's Q4 guidance underwhelmed.
In the fourth quarter, management now expects revenue between $1.95 billion and $2.05 billion, and adjusted EPS between $1.13 and $1.27 per share. Those figures are well below estimates of $2.18 billion in revenue and $1.36 in EPS heading into the quarter.
On the call, management noted the slowdown came from some large auto customers in Europe, as well as broad-based slowness in the industrial sector.
A peaking market, or just a speed bump?
Whenever a market slows down, investors are left debating whether that means the market is peaking, or may not be as large as thought, or if the slowdown is just a near-term cyclical phenomenon.
Obviously, with the Federal Reserve having hiked interest rates at the fastest pace in history over the past couple of years, that could mean the slowdown may be more cyclical. Certainly, there are a lot of government incentives now to push people into electric vehicles in the years ahead, especially as technology improves and EV ranges expand.
On is a leader in silicon carbide chips, which are thought to be crucial to the future efficiency and range expansion of EVs. So if you think this is a speed bump for EVs and not a peaking market, the stock could certainly be a buy here, now at just 15 times trailing earnings.
