What Is One of the Best Semiconductor Stocks to Own for the Next Decade?
News Summary
The article highlights ON Semiconductor as a compelling stock for long-term ownership, citing its attractive valuation and strong long-term growth prospects despite facing near-term headwinds. ON Semi primarily provides power and sensing solutions to the automotive (55% of 2024 revenue) and industrial (25%) sectors, with offerings including silicon carbide (SiC) chips for EVs, intelligent sensors, and analog/mixed-signal ICs. Its "other" segment also includes exposure to AI/data center spending and consumer electronics, notably as an Nvidia partner. While near-term risks stem from a slowdown in EV investment and industrial sluggishness, EVs are identified as the long-term growth driver for the auto industry. Trading at roughly 14 times Wall Street analysts' consensus for 2025 free cash flow, ON Semiconductor offers a margin of safety in its valuation and significant long-term growth potential, making it an attractive risk/reward proposition.
Background
ON Semiconductor is a global company specializing in intelligent power and sensing technology solutions, with products widely used across automotive, industrial, communications, and cloud computing markets. Its silicon carbide (SiC) technology is particularly critical for electric vehicles (EVs), driving power conversion efficiency. Currently, the global semiconductor industry is experiencing cyclical fluctuations, compounded by high interest rates impacting auto sales and, consequently, a near-term slowdown in EV investment. Concurrently, global industrial activity faces some downward pressure. These macro factors collectively define ON Semiconductor's operating environment. Since late 2023, these macroeconomic headwinds have contributed to a deceleration in the company's sales growth. Nevertheless, automotive electrification and industrial automation remain robust long-term trends, providing a solid foundation for ON Semiconductor's future development.
In-Depth AI Insights
What are the deeper dynamics behind the stated slowdown in EV investment in 2025 under the Trump administration, and how might ON Semi's specific automotive exposure mitigate or exacerbate these risks? - The EV investment slowdown in 2025, under the continued influence of the Trump administration's "America First" policies, may transcend mere high interest rates or automaker losses. - It could reflect heightened uncertainty regarding EV subsidy policies and a potential pivot back towards internal combustion engine (ICE) and hybrid markets to satisfy certain consumer segments and support traditional auto manufacturing jobs. - ON Semiconductor's focus on Silicon Carbide (SiC) chips, particularly for EV powertrains, positions it to capture demand for core technological upgrades. Even with slower EV sales growth, the need for more efficient, high-performance components will persist. - However, escalating trade protectionism leading to increased global supply chain costs or market fragmentation could challenge its global business model, especially if major auto markets push for localized production mandates. Given ON Semiconductor's "compelling valuation" at 14 times 2025 FCF, how sustainable is this valuation considering potential shifts in global trade policies or increased domestic manufacturing incentives under Trump's second term? - The Trump administration might pursue more aggressive trade protectionist measures, such as tariffs on imported semiconductor products, or further incentivize U.S. domestic semiconductor manufacturing through acts like the CHIPS and Science Act. - These policies could lead to increased complexity and costs within ON Semiconductor's global supply chain, particularly for its non-U.S. manufacturing sites. In the short term, this could compress margins, thereby putting pressure on the 14x FCF valuation. - Conversely, if ON Semiconductor can effectively leverage U.S. domestic manufacturing incentives and deepen collaboration with North American customers through its technological advantages, its competitiveness in the domestic market could strengthen, potentially offsetting some negative impacts from trade friction. - Investors must assess the flexibility of its supply chain and its ability to navigate geopolitical risks to determine the long-term support for its current valuation. The article mentions ON Semi's exposure to AI/data centers and an Nvidia partnership. Given the intense competition and rapid technological evolution in AI chips, what are the realistic long-term growth prospects and competitive advantages for ON Semi in this segment beyond its core automotive/industrial focus? - ON Semiconductor's involvement in AI/data centers is likely as a provider of power management and intelligent sensing solutions, rather than a direct competitor in AI computing chips. This allows it to benefit from AI compute growth without bearing the high risks of direct chip design. - Its partnership with Nvidia probably focuses on optimizing data center energy efficiency or providing edge AI sensing solutions, leveraging synergies with its strengths in power management and image sensors for automotive and industrial applications. - While this segment offers significant growth potential, ON Semiconductor needs continuous R&D investment to ensure its power and sensing solutions meet the stringent demands of AI workloads for higher power density, efficiency, and low latency. - Long-term, the AI/data center business will serve as a strong complement, not a replacement, to its core operations. Its competitive advantage will lie in differentiating its foundational components for AI infrastructure based on existing technological prowess, rather than direct competition in the general AI chip market.