ON Semiconductor (ON -1.03%) and Navitas Semiconductor (NASDAQ: NVTS) were both named as companies Nvidia is partnering with to develop the next generation of data centers. Navitas is a loss-making company that isn't likely to be profitable until 2027, andng company trading at a very attractive valuation. Navitas' stock is up 89% so far this year as I write this, while ON Semiconductor's is down almost 19%. Go figure.
Why isn't ON Semiconductor attracting more investor attention?
The comparison made above isn't to be critical of Navitas. It's a company with a big future, and the Nvidia partnership will likely be a needle mover for a small loss-making company. Instead, the focus is on highlighting what a good long-term value ON Semiconductor looks like right now.
There's little doubt as to the reason why ON Semiconductor's stock price has been so weak over the last year (down 28%). The company's core market is in silicon carbide (SiC) chips, an end market dominated by the auto industry and electric vehicles in particular.
Consequently, when the EV market suffers a sustained downturn, with expectations lowered throughout the year, then ON Semi will also suffer downward revisions to expectations. That's precisely what's happened this year.
As the chart below demonstrates, sales to its automotive-related end market continue to experience year-on-year declines. Unfortunately, there's little the company can do about relatively high interest rates, which make it more expensive to buy autos, or the automakers' response in cutting production plans.
Data source: ON Semiconductor. Chart by author.
Three reasons why a turnaround could be coming soon
However, investors are likely too pessimistic about the company's prospects, and ON Semiconductor's recent earnings report and some news items highlight that.
First, CEO Hassane El-Khoury has consistently taken a cautious approach to guidance during the downturn. Still, he noted on the last earnings call, on Aug. 4, that "we are seeing signs of stabilization across our end markets." Indeed, if you look closely at the chart above, you can see that, while the year-over-year comparison remains negative, revenue grew on a sequential basis (quarter-to-quarter).
That's a positive sign of a recovery building. Moreover, El-Khoury told investors that automotive revenue was better than expected in the second quarter and he expects it to grow "in the third quarter with continued EV ramps."
Second, the Nvidia partnership highlights the potential in the company's industrial-based sales. As El-Khoury noted when discussing the need for AI infrastructure, notably power, "onsemi is the only broad-based U.S. power semiconductor supplier addressing this challenge with our intelligent power semiconductors, dramatically increasing power density and reducing energy loss."
Image source: Getty Images.
Third, despite the slowdown, ON Semiconductor remains a well-run business that's generating value for investors, and it trades on an excellent valuation. Focusing on free cash flow (FCF), management continues to expect to convert 25% of revenue into FCF in 2025. Based on analyst forecasts for revenue, this would produce about $1.44 billion in FCF, and, as noted above, it would mean the stock trades at just 14.5 times FCF in 2025 -- that's low for a company with such exciting long-term growth prospects, even if it faces near-term headwinds.
A once-in-a-lifetime stock buy
If you can tolerate the potential for bad news, then ON Semiconductor looks like a very attractive stock. The EV market is currently challenging, but automakers who fail to develop a viable EV business will struggle to become significant players in the future. Because of this, a new wave of investment will eventually come, and that will help ON Semiconductor's core market.
At the same time, its Nvidia partnership is exciting and would likely hit the news more frequently if the stock's narrative weren't so heavily focused on its EV exposure.
Following a trough year in 2025, Wall Street expects the company to grow earnings by 29% in 2026, and if that comes to fruition, then the stock will be markedly higher then.
