Semiconductor Company ON or onsemi (NASDAQ:ON) investors who decided to buy in November after third-quarter earnings fell did well, outperforming the S&P 500 (SPX) (SPY) since my previous update. I underlined the capitulation of the ON in my November article, explaining why ON's valuation has normalized from its 2023 highs. As a result, it looked much more attractive, leading me to add exposure, given the fantastic opportunity to buying down. As a result, I upgraded ON, evaluating a solid setup for new and existing investors to choose their place.
Despite this, Ontario's initial recovery peaked in mid-December 2023, as persistent weakness in the electric vehicle and renewable energy markets likely hasn't inspired Ontario's dip buyers to hold on to their positions. Despite this, I evaluated onsemi management and provided a reasonable comment on the fourth quarter results. However, Onsemi's forward guidance suggests that 2024 will likely be another year of growth normalization, with its revenue growth having reached its cycle peak in 2022.
Investors should remember that onsemi delivered fourth-quarter revenue growth of -1% in 2023, in line with widespread weakness in its automotive and industrial market segments. These two segments accounted for 80% of its revenue base in FY23, as onsemi moves towards capitalizing on “high-growth megatrends for sustainable ecosystem development”. However, while the long-term secular growth themes remain intact, short-term cyclical challenges emerged at the end of 2023, particularly in the electric vehicle sector. Given Onsemi's growing exposure, it should be clear why investors should be cautious about their previous bullish thesis, as ON has surged toward its unsustainable July 2023 highs.
Investors were probably also caught off guard by the marked change in sentiment, as even the Electric vehicle players surprised by recent weakness. Even major clean energy leaders have seen a significant drop, highlighting the need to remind ourselves to respect market cycles.
Onsemi first quarter outlook also lower than previous analysts' estimates. As a result, the company guided to a median revenue estimate of $1.85 billion, reflecting “continued weakness across all end markets.” Close followers of Onsemi should be aware of the market share gains made by the company in silicon carbide, or SiC. As a result, Onsemi informed us that it had achieved a 25% market share. Management estimates that the company could “experience growth twice as high as the market in 2024, leveraging the rise of customers in the industrial and automotive sectors.”
Furthermore, management commentary indicates that its usage could bottom out in the first half. Onsemi stressed its confidence in maintaining a “gross margin above the floor of 40% with utilization of around 60%”. With usage down to 66%, it is reasonable to assume that we should have seen its lowest level in the medium term. The company indicated a median gross margin outlook of 45.5% in the first quarter, down from 46.7% in the fourth quarter. Revised analyst estimates suggest the company could end 2024 with a gross margin of 45.7%. Onsemi said it remains focused on execution in 2024, paying attention to improving its profitability profile while digesting the ongoing growth normalization. As a result, he believes that the steps taken to focus on the most valuable market segments will be constructive in emerging from the economic downturn in better shape.
I evaluated that the near-term supply and demand dynamics in the automotive chip market may remain uncertain. This should explain why ON fell to its November 2023 lows, down almost 45% from its July 2023 highs. However, even the downwardly revised forecast for the first quarter of 2024 does not did not lead to further sell-offs, suggesting that Ontario likely reached a peak of pessimism late last year. As a result, the market is likely looking forward, as onsemi remains well positioned to lead its potential cyclical recovery. Investors who decide to wait until the coast is clear could continue to miss out on the ongoing recovery.
ON’s price action clearly indicates its long-term uptrend bias. Dip buyers vigorously defended Ontario's November 2023 lows at the $61 level. Even though January's selloff digested December's gains, the recovery in earnings after the fourth quarter suggests the market was not unduly concerned about the tepid first-quarter 2024 forecast.
As a result, investors have another opportunity to buy into ON's long-term growth thesis before continuing its uptrend toward its 2023 highs. Don't wait for all the good news to come in before jumping in. By then, you could end up chasing the next potential cycle peak.
Note: Maintain purchase.
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