ON Semiconductor (NASDAQ:ON) Delivers Impressive Q4, Stock Soars

Kayode Omotosho /
2022/02/07 8:40 am EST
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Analog chips maker ON Semiconductor (NASDAQ: ON) reported results ahead of analyst expectations in the Q4 FY2021 quarter, with revenue up 27.6% year on year to $1.84 billion. On top of that, guidance for next quarter's revenue was surprisingly good, being $1.9 billion at the midpoint, 6.77% above what analysts were expecting. ON Semiconductor made a GAAP profit of $425.9 million, improving on its profit of $89.8 million, in the same quarter last year.

Is now the time to buy ON Semiconductor? Access our full analysis of the earnings results here, it's free.

ON Semiconductor (ON) Q4 FY2021 Highlights:

  • Revenue: $1.84 billion vs analyst estimates of $1.79 billion (3.08% beat)
  • EPS (non-GAAP): $1.09 vs analyst estimates of $0.94 (15.9% beat)
  • Revenue guidance for Q1 2022 is $1.9 billion at the midpoint, above analyst estimates of $1.77 billion
  • Free cash flow of $457 million, up 28.4% from previous quarter
  • Inventory Days Outstanding: 124, up from 118 previous quarter
  • Gross Margin (GAAP): 45%, up from 32.1% same quarter last year

“Our disciplined execution on transformation initiatives in 2021 resulted in record financial performance and achievement of our financial targets ahead of stated timeline. Revenue for 2021 grew 28.3%. Operating income and free cash flow increased 6 times faster than the revenue as we focus our portfolio on secular megatrends of electric vehicles, ADAS, alternative energy and industrial automation. We continue to expand gross margins as we shift our mix into these high-value strategic markets while ramping new products, rationalizing our manufacturing footprint, and improving our overall cost structure. Outlook for our business remains robust as evidenced by over 60% year-over-year growth in our design win funnel driven by our highly differentiated intelligent power and sensing portfolio,” said Hassane El-Khoury, president and CEO of onsemi.

Spun out of Motorola in 1999, and built through a series of acquisitions, ON Semiconductor (NASDAQ: ON) is a global provider of analog chips with specialization in autos, industrial applications, and power management in cloud data centers.

Demand for analog chips is generally linked to the overall level of economic growth, as analog chips serve as the building blocks of most electronic goods and equipment. The biggest secular growth drivers currently are the adoption of electric vehicles, 5G networks and Internet of Things connectivity, and demand for chips that reduce power consumption. Unlike digital chip designers, analog chip makers tend to produce the majority of their own chips, as analog chip production does not require expensive leading edge nodes. Less dependent on major secular growth drivers, analog product cycles are much longer, often 5-7 years.

Sales Growth

ON Semiconductor's revenue growth over the last three years has been unimpressive, averaging 5.85% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $1.44 billion to $1.84 billion. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

ON Semiconductor Total Revenue

This was a good quarter for ON Semiconductor as revenues grew 27.6%, topping analyst estimates by 3.08%. This marks 5 straight quarters of revenue growth, implying we are mid-cycle for ON Semiconductor, as a typical upcycle tends to last 8-10 quarters.

ON Semiconductor believes the growth is set to accelerate, and is guiding for revenue to grow 28.2% YoY next quarter, and Wall St analysts are estimating growth of 6.34% over the next twelve months.

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Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.

ON Semiconductor Inventory Days Outstanding

This quarter, ON Semiconductor’s inventory days came in at 124, 3 days above the five year average, suggesting that inventory has grown to a level slightly above the long term average.

Key Takeaways from ON Semiconductor's Q4 Results

With a market capitalization of $24.7 billion, more than $1.35 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We were very impressed by the strong improvements in ON Semiconductor’s gross margin this quarter. And we were also excited to see that earnings outperformed Wall St’s expectations. On the other hand, there was an increase in inventory levels. Zooming out, we think this impressive quarter should have shareholders feeling very positive. The company is up 7.11% on the results and currently trades at $61.54 per share.

ON Semiconductor may have had a good quarter, so should you invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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The author has no position in any of the stocks mentioned.