Analyst Note| William Kerwin |
We’re raising our fair value estimate for narrow-moat Onsemi to $74 per share, from $67 previously, following a strong second quarter and bullish outlook. We’re impressed with Onsemi raising its already-robust silicon carbide, or SiC, targets for the next couple years, which we think will be a key growth driver and differentiator in both the automotive and industrial markets. Shares dipped modestly after the print, likely due to worries about weakness in Onsemi's non-core markets and margin headwinds. We are more confident, and also expect Onsemi would fare relatively well in a potential near-term chip downcycle. Onsemi increasingly benefits from secular trends like those toward electric and autonomous vehicles and we believe a greater mix of differentiated chips should reduce margin cyclicality. We continue to expect the firm to hit management's ambitious 2025 targets, and note it is already in its target profitability ranges. We view shares as modestly undervalued.