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onsemi (ON) Boosting Prospects by Investing in Megatrends

onsemi ON shares have risen 5.4% in the year-to-date period, beating the Zacks Semiconductor – Analog and Mixed industry’s and the Zacks Computer and Technology sector’s decline of 58.3% and 30.4%, respectively.

The entire Semiconductor - Analog and Mixed industry is reeling under various operational challenges due to a number of macroeconomic turmoils, like persistent supply chain constraints, raging inflation, ongoing Russia-Ukraine war, forex market volatility and looming recession.

However, onsemi has been able to beat the cyclical downtrend by investing in strategic areas like intelligent power and sensing products, which helps it to expand gross and operating margins. ON has forayed into building these products to capitalize on the uptrend in the market for vehicle electrification, ADAS, energy infrastructure and factory automation.

onsemi has a very well-diversified business. The company generates a significant percentage of revenues from each of the computing, consumer, industrial, communications and automotive markets. onsemi reported revenues of $2.19 billion in the last reported third quarter of 2022 which beat the Zacks Consensus Estimate by 3.6% and improved 26% on a year-over-year basis.

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The company is reallocating capacity to strategic and high-margin products to drive a favorable mix shift and eliminate price-to-value discrepancies. To do so, onsemi is expanding its production capacity in strategic locations and closing fab locations in areas, which are impacting its margin growth negatively due to rising price surges in operating in those areas.

ON Semiconductor Corporation Price and Consensus

ON Semiconductor Corporation Price and Consensus
ON Semiconductor Corporation Price and Consensus

ON Semiconductor Corporation price-consensus-chart | ON Semiconductor Corporation Quote

onsemi Reallocating Fab locations to Reduce Costs

onsemi has been expanding its silicon carbide (SiC) facilities domestically and internationally to diversify its product portfolio. Per onsemi, the SiC total addressable market is projected to grow from $2 billion in 2021 to $6.5 billion in 2026, at a CAGR of 33%.

The company recently expanded its Hudson, NH facility, which will increase SiC boule production capacity by five times year over year. This will aid in meeting the rising demand for SiC-based solutions, which is critical for developing EVs and energy infrastructure and is an important contributor to decarbonization.

ON recently expanded its SiC facility in Roznov, Czech Republic to expand SiC production capacity by 16 times. So far, ON has invested more than $150 million in the Roznov site and will be looking to spend an additional $300 million through 2023.

onsemi, which currently carries Zacks Rank #3 (Hold), is not only expanding its production capacity. The company has recently completed the sale of its Niigata, Japan facility, which aligns with its fab liter strategy to expand gross margin and reduce fixed cost footprint. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Further positively impacting onsemi’s decision to close operations in Japan is President Biden's decision to sign the CHIPS and Science Act, supporting investments in domestic semiconductor manufacturing and reducing dependence on foreign markets like China and Japan. Its peer Microchip Technology MCHP is also looking to benefit from the recent declaration of the act by the government.

The government's recent declaration will help Microchip to diversify income from its microcontroller business, which is riddled with supply-chain disturbances. Microchip continues developing and introducing a wide range of innovative and proprietary new linear, mixed-signal, power, interface and timing products to spur growth in the analog business.

However, ON is facing stiff competition from Texas Instruments TXN and STMicroelectronics STM.

STMicroelectronics’ third-generation STPOWER SiC MOSFETs help meet the energy-saving efficiency requirements in EVs and are a chief competitor of onsemi in the EV market. STMicroelectronics’ solutions will help EV makers achieve faster charging and reduce EV weight, helping STM to win a significant market share in the industry.

Texas Instruments is also seeing success in certain fast-growing automotive market segments. TXN is focused on infotainment, safety and ADAS, body electronics (including lighting), hybrid electric vehicles and powertrain segments of the automotive market. It also experiences significant traction from the EV megatrend.

onsemi, however, signed long-term supply agreements with various customers for the next three years, which is expected to help secure $1 billion of committed SiC revenues in 2023.

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Texas Instruments Incorporated (TXN) : Free Stock Analysis Report

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