What a time it’s been for onsemi. In the past six months alone, the company’s stock price has increased by a massive 113%, reaching $117.35 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy onsemi, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is onsemi Not Exciting?
We’re happy investors have made money, but we’re swiping left on onsemi for now. Here are three reasons you should be careful with ON, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, onsemi’s sales grew at a tepid 2.1% compounded annual growth rate over the last five years. This was below our standards. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect onsemi’s revenue to rise by 9.9%. While this projection implies its newer products and services will fuel better top-line performance, it is still below average for the sector.
3. Low Gross Margin Reveals Weak Structural Profitability
In the semiconductor industry, a company’s gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.
onsemi’s gross margin is well below other semiconductor companies, indicating a lack of pricing power and a competitive market. As you can see below, it averaged a 39% gross margin over the last two years. That means onsemi paid its suppliers a lot of money ($61.02 for every $100 in revenue) to run its business.
Final Judgment
onsemi isn’t a terrible business, but it doesn’t pass our bar. Following the recent rally, the stock trades at 39× forward P/E (or $117.35 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks We Like More Than onsemi
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