Shares of ON Semiconductor (ON 2.53%) have been clobbered in recent months as worries about the state of the electric vehicle (EV) market have mounted. Tesla sales are under pressure, some legacy automakers have been pulling back on rollouts of their new EV models in favor of (currently) more profitable internal combustion models, and high interest rates have proven to be a formidable barrier to financing a new EV for many consumers.
ON Semiconductor (or, onsemi, as the company has branded itself) just proved the worry is real, and the stock is now down by more than 40% from the all-time high it reached just a couple of months ago. Is it time to buy the dip before the stock charges up again?
Guidance has the market worried
First, let's acknowledge the solid results onsemi just delivered for the third quarter. Revenue came in at $2.18 billion, which was near the high end of its guidance range, in spite of management selling off or exiting underperforming business lines in the last couple of years. Profit margins also remained high as the chip designer and manufacturer began to come out of a phase of spending on chip fab expansion. Construction of its expanded silicon carbide (SiC) project in South Korea recently wrapped up -- it's now the largest such fab in the world.
Data by YCharts.
But SiC is also creating some headaches at the moment. SiC -- silicon-plus-carbon, as opposed to the traditional silicon used in semiconductors -- is a chip substrate that's increasingly being used in EVs and EV charging stations because of its ability to handle higher voltages. SiC has been an important growth business for onsemi, which has positioned itself to be primarily exposed to higher-growth and higher-margin trends. Up to this point, this shift has helped onsemi outperform peers like Texas Instruments in what has been a tough year for the chip industry.
However, with global economic growth slowing, SiC sales are slowing too. CEO Hassane El-Khoury said Europe in particular is experiencing weakening consumer demand, and one of its key SiC auto parts manufacturing partners is saying it needs to work through an excess of SiC inventory beginning in the fourth quarter. As a result -- and in combination with some weakness in the industrial markets onsemi serves -- its total revenue for Q4 is expected to be in the range of $1.95 billion to $2.05 billion. That would be as much as an 11% decline sequentially from Q3, and down as much as 7% from its $2.1 billion in sales during Q4 2022.
Further, when asked for his early assessment of 2024, El-Khoury provided a not-so-great outlook. To be clear, the management team is providing no specific guidance at this point. That said, though, El-Khoury said on the conference call regarding 2024:
On the silicon side [non-SiC chips], we see flat, slightly down. Again, depending on what you believe, the market. We are not planning, nor are we looking at a first half of '24 recovery. As I said on the last quarter, we see '24 as kind of going sideways with growth in silicon carbide for us.
In other words, don't expect a dramatic rebound for at least a few quarters for the auto and industrial chip markets overall.
Are headwinds ahead for onsemi stock?
To further clarify, though onsemi sees its core silicon business going sideways (no growth) at best from 2023 to next year, it does still see growth in SiC chips -- albeit at a slightly slower pace than before.
Management had previously stated that SiC was on track to become a $1 billion business for onsemi this year, a substantial increase from the meager $200 million in 2022. In large part because of that aforementioned European auto parts partner, that outlook has been reduced to "over $800 million in SiC sales."
And in 2024, management still anticipates its SiC sales will double the rate of overall SiC market growth. Some forecasts still point toward SiC chip sales growing by 40% worldwide next year, seemingly implying onsemi's SiC business could grow by 80% in 2024, sending it from "over $800 million" to perhaps $1.4 billion next year -- or $600 million in additional 2024 revenue as the non-SiC business remains flat.
Put simply, a base scenario for onsemi at this point could be mid-single-digit-percentage revenue growth next year, and management believes it can hold profit margins somewhat steady despite some turbulence in consumer EV demand.
Granted, things could wind up being worse than that. After all, while EVs are still a growing market overall, and chip content per vehicle is an order of magnitude higher in an EV than in an internal combustion vehicle, rising interest rates are putting a cap on what many households can afford to pay for a new car. Stay tuned for details on this.
That said, onsemi's recent share price plunge looks to have created a great buying opportunity. Shares now trade for 24 times trailing 12-month free cash flow, a metric that could dramatically improve. (Again, that construction has wrapped up on projects like the SiC fab in South Korea is a positive.) Speed bumps slowing down the EV market aside, onsemi could remain a top beneficiary of that market's growth over the next decade. Consider utilizing a dollar-cost average plan to build up a position in this stock over time if you believe onsemi is on the right track.
