It's not often that a technology stock flashes up as a value stock, but that's the compelling opportunity that ON Semiconductor (ON +0.13%) offers investors right now. The company appears to have passed an inflection point in demand from its core automotive and industrial end markets, and it has a significant growth kicker from its fast-growing exposure in AI/data centers.
Now could be a great time to initiate a position in ON Semiconductor stock. Here's why.
ON Semiconductor as a value stock
The power and sensing-focused chipmaker boasts some enviable statistics: a non-GAAP gross margin of 38% in the third quarter that drops down into a 19% non-GAAP operating margin. Additionally, the company excels at translating earnings into cash flow, having converted 21% of its revenue into free cash flow (FCF) so far in 2025.
Wall Street analysts expect the company to generate $1.4 billion in FCF in 2025, a figure that would put the stock on just 13.8 times FCF this year. That's a good value for a mature low-growth company, but it's an excellent value for a company with the kind of long-term growth prospects that ON Semiconductor has.
NASDAQ: ON
Key Data Points
Long-term growth, near-term pressure
Management has structured the company around two core end markets: automotive and industrial. Within the automotive industry, it provides intelligent power and sensing solutions to the electric vehicle (EV) market, notably with its silicon carbide (SiC) chips, as well as to traditional internal combustion engine (ICE) vehicle manufacturers. In industrial, it targets a range of end markets including EV charging networks, industrial automation, machine vision, robotics, and smart cities/buildings.
These are excellent end markets to be in over the longer term. Unfortunately, a combination of automakers paring back EV investment in response to slowing sales growth and pressure on profit margins, and a slowdown in the industrial sector over the last year or so, has affected ON Semiconductor's sales over the last couple of years.
Image source: Getty Images.
Passing an inflection point and AI/data center growth
The weakness is demonstrated in the chart below. However, as you can also see below, ON Semiconductor appears to have passed an inflection point with its overall revenue -- and, notably, with both its key end markets.
While CEO Hassane El-Khoury was cautious enough to declare that customers weren't restocking yet (a move they might make in anticipation of growth), he did say that the company's automotive and industrial end markets were stabilizing, with seasonal trends returning.
Additionally, note the sequential growth in its "other" revenue. This category encompasses all revenue sources outside of its core end markets, including a range of consumer products and its AI/data center revenue.
Data source: ON Semiconductor presentations. Chart by author.
ON Semiconductor, Nvidia, and AI/data centers
The company is listed as an Nvidia partner and collaborator on the next generation of data centers, known as 800V high-voltage direct current (HVDC) data centers, scheduled for release in 2027. The new data centers involve a fundamental restructuring of how power is transferred to the IT rack. ON Semiconductor is "able to support the power delivery from the high voltage all the way to the core," according to El-Khoury on the earnings call.
The partnership highlights the company's fast-growing AI/data center revenue. Although management only expects $250 million in revenue from it in 2025 (compared to total company revenue of $6 billion), it doubled year over year in Q3. If it doubles in 2026, it will reach $500 million and contribute $250 million in revenue growth, representing a 50% increase. That would be significant.
Image source: Getty Images.
Where next for ON Semiconductor?
While the company continues to face near-term headwinds, the worst appears to be over, and the valuation is attractive. In addition, no one really doubts the need for automakers to invest in EVs over the long term, and history suggests that the industrial sector will return to cyclical growth.
Moreover, suppose Wall Street analyst estimates are correct, and the company returns to mid-single-digit growth in 2026 and double-digit growth in 2027. In that case, increased factory utilization will lead to greater margins and FCF generation, aligning with management's plans.
