This semiconductor company offers a compelling way to invest in exciting, long-term growth markets such as electric vehicles (EVs) and the electrification of the economy. Still, it doesn't come with the sky-high valuations of many other semiconductor stocks. Here's why it's an outstanding stock to buy for patient investors.
ON Semiconductor stands out as a good value
The company I'm referring to is ON Semiconductor (ON +0.30%), a company specializing in intelligent power and intelligent sensing solutions, primarily focused on the automotive and industrial end markets. Additionally, it has a rapidly growing artificial intelligence (AI) and data-based business. As an Nvidia partner, it's set to play a key role in power solutions for the next generation of data centers, hitting the market sometime in 2027.
Image source: Getty Images.
At this point, readers might be forgiven for thinking the stock trades at a nosebleed valuation. In fact, it trades at 21 times estimated 2025 earnings and 14.5 times estimated 2025 free cash flow (FCF). Moreover, Wall Street analysts expect this to be a trough year in the company's fortunes, with earnings increasing by 25% next year and FCF increasing by slightly less.
NASDAQ: ON
Key Data Points
Management is also using its free cash flow wisely, having recently approved a share buyback program of up to $6 billion over the next three years.
As shown below, the semiconductor company has a strong track record of reducing its share count over the past few years. That's good for existing investors because it increases their stake in the company's future earnings and cash flow, provided that ON Semiconductor will grow earnings in the future.
ON Shares Outstanding data by YCharts
ON Semiconductor's growth prospects
The stock's low valuation is mainly due to a significant slowdown in its main markets over the past few years, as shown in the chart below.
In automotive, its most important end markets include power and sensing chips for electric vehicles (EVs), advanced driver assistance systems (ADAS), and lighting, sensors, and powertrain components for the automotive industry at large. Examples of its tie-ups in the automotive sector include long-term deals to supply power solutions to Volkswagen, China's premium EV maker ZEEKR, and BMW.
In industrials, it has exposure to industrial automation, EV charging infrastructure, machine vision, and smart infrastructure. The "other" segment encompasses AI/data centers and a wide range of consumer electronics products.
Unfortunately, many of these end markets have weakened over the last couple of years as EV sales haven't grown at the rate automotive companies previously expected, and the industrial sector has slowed overall.
Data source: ON Semiconductor presentations. Chart by author.
An evolving EV market
It's clear that investment in EVs has slowed. This was expected after the significant surge in investment during the COVID-19 lockdowns, when automakers accelerated EV development amid declining overall sales.
Even so, the reality is that EVs are still the growth area of the automotive market, and recent multi-billion-dollar investment commitments by Ford indicate that the focus of investment is shifting from aggressively gaining market share to targeting the development of affordable models.
At some point, the EV market will inevitably stabilize -- ON Semiconductor CEO Hassane El-Khoury thinks the company's automotive and industrial end markets have already done so -- and then start to grow again.
A stock to buy
It's challenging to predict exactly when the next growth phase will begin, and there may be some short-term setbacks. Still, the stock's current valuation offers a good margin of safety, and the potential upside is strong. Growing industries like EVs tend to keep investing, and the industrial sector is known for its cycles. The company's expected boost in AI and data center revenue -- about $250 million out of $6 billion in projected 2025 revenue -- and its partnership with Nvidia make the investment case even stronger.
Overall, this stock is an excellent value for investors who are focused on the long term.
