On Tuesday, JPMorgan (NYSE:JPM) adjusted its outlook on ON Semiconductor (NASDAQ:ON) shares, reducing the price target from $90 to $85 while maintaining a Neutral rating on the stock. ON Semiconductor's first-quarter results surpassed consensus expectations, with particular strength noted in the industrial sector.
However, the company's second-quarter revenue guidance suggested a 7% quarter-over-quarter decline, falling short of market expectations. This forecast was attributed to a broad-based end market weakness and subdued orders from China following the Chinese New Year, aligning with peer STMicroelectronics' guidance.
Despite this, JPMorgan predicts that the June quarter may represent the cycle's low point for ON Semiconductor, with expectations for a revenue recovery in the second half of the year. The firm anticipates stabilization in ON's core silicon semiconductor business and a stronger performance in the silicon carbide (SiC) sector due to the rollout of new electric vehicle models, particularly from European and Chinese manufacturers.
ON Semiconductor reported a reduction in requests for order deferrals under long-term supply agreements, primarily for SiC products, and noted emerging positive trends, including increased orders for non-long-term supply agreement business, which mainly consists of silicon semiconductors. The company plans to maintain a 65% manufacturing utilization rate, indicating stable order trends and an expectation for customer inventory levels to normalize.
Looking ahead, the company's lead times have slightly decreased quarter-over-quarter but remain lengthy at 40-41 weeks, providing visibility for the second half of the year. ON Semiconductor is confident in doubling the industry growth rate for its SiC business in 2024, though it has not provided an updated industry growth forecast.
The company continues to progress towards its operational goals, including ramping up SiC manufacturing, improving yields and margins, and executing its long-term growth strategy. It is on track for a transition to 200mm wafers, with a revenue ramp expected in 2025.
The design win pipeline for ON Semiconductor has grown by 30% quarter-over-quarter, supporting a long-term revenue compound annual growth rate of 10-12%. The company also reported a 9% year-over-year increase in new product revenues with favorable gross margins.
For 2024, JPMorgan estimates a low-teen percentage year-over-year decline in total revenues. Gross margins are expected to benefit from several factors, including the reversal of 100 basis points of exchange rate fluctuations, cost savings from previous factory consolidations amounting to $160 million, and improvements in manufacturing utilization.
Distribution inventory levels are lean, currently at 8 weeks, up from 7.2 weeks in the previous quarter, with plans to increase inventory levels to 9 weeks over the next several quarters. Consequently, JPMorgan has revised its forward estimates for ON Semiconductor and lowered its December 2024 price target.
InvestingPro Insights
As ON Semiconductor navigates through market fluctuations and sets its sights on a recovery in the latter half of the year, InvestingPro data and tips provide a valuable perspective for investors monitoring the company's performance. With a market capitalization of $30.44 billion and a forward-looking P/E ratio of 13.86, the company is trading at a low P/E ratio relative to near-term earnings growth, which could signal an attractive valuation for investors considering the company's growth potential.
Despite a slight dip in revenue over the last twelve months, with a decline of 2.22%, ON Semiconductor maintains a robust gross profit margin of 46.86%. The company's operational efficiency is also evident through a substantial operating income margin of 31.6%. Moreover, the company has demonstrated a significant return over the last week, with a 14.82% price total return, indicating strong short-term investor confidence.
InvestingPro Tips suggest that while analysts have revised their earnings downwards for the upcoming period and anticipate a sales decline in the current year, ON Semiconductor is still expected to be profitable this year. Additionally, the company operates with a moderate level of debt and has liquid assets that exceed short-term obligations, which could provide financial stability in uncertain times. For investors seeking more in-depth analysis and additional tips, there are 19 more InvestingPro Tips available, which can be accessed with a subscription. Use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
With an InvestingPro Fair Value estimate of $76.89, slightly below the analyst target of $85, investors have a benchmark for assessing the stock's potential upside. As ON Semiconductor progresses towards its operational goals and the SiC business revenue ramp expected in 2025, these insights could help investors make informed decisions.
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