On Tuesday, Mizuho adjusted its stance on ON Semiconductor (NASDAQ:ON), reducing the stock's price target to $87 from the previous $92 while retaining a Buy rating.
The semiconductor company reported its March quarter results, which were in line with expectations but provided a June quarter guidance that suggested a roughly 7% sequential decline in revenue, falling short of the consensus estimate of a 2% decrease. This forecast contrasts with peers such as Microchip Technology (NASDAQ:MCHP) and NXP Semiconductors (NASDAQ:NXPI), which are expected to see a 1% increase and a 1% decrease, respectively, in the same quarter.
ON Semiconductor attributed the softer guidance to weaker automotive demand heading into the June quarter, although it anticipates stabilization in the second half of the year as original equipment manufacturers (OEMs) normalize inventory. The company also highlighted that its silicon carbide (SiC) revenues are projected to continue growing at twice the market rate, driven by new 800-volt OEM launches in China planned for the second half of 2024.
Despite a challenging environment, ON Semiconductor's gross margins are expected to remain relatively flat, with factory utilization holding steady at around 65% throughout the estimated period. The company mentioned that a one percentage point change in utilization could impact gross margins by 15 to 20 basis points.
The current backlog stands at $15.7 billion, with a near-term marketable backlog of $4.7 billion.
While Mizuho acknowledges potential risks related to softening electric vehicle (EV) demand and rising competition in the SiC market in China, the firm maintains its positive outlook on ON Semiconductor. The company's SiC business is seen as a key growth driver, supporting the decision to maintain a Buy rating despite lowering the price target and earnings estimates.
InvestingPro Insights
ON Semiconductor's recent guidance has raised some eyebrows, but a deeper dive into the InvestingPro data and tips reveals a nuanced picture. With a market capitalization of $30.44 billion and trading at a low P/E ratio relative to near-term earnings growth (adjusted P/E ratio as of Q1 2024 is 13.86), ON Semiconductor presents an interesting case for investors. The company's revenue growth has seen a slight dip of -2.22% over the last twelve months as of Q1 2024, yet the gross profit margin remains robust at 46.86%.
InvestingPro Tips highlight that although analysts have revised their earnings downwards for the upcoming period, the company is still expected to be profitable this year. Additionally, ON Semiconductor's liquid assets exceed its short-term obligations, and it operates with a moderate level of debt. These factors suggest a degree of financial stability that could be reassuring to investors.
For those interested in further analysis, there are 19 additional InvestingPro Tips available, providing a comprehensive outlook on ON Semiconductor's financial health and market position. Utilize the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription and gain access to these insights. With the next earnings date on the horizon, July 29, 2024, investors will be watching closely to see how the company's projections and market dynamics play out.
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