ON Semiconductor (NASDAQ:ON) Posts Better-Than-Expected Sales In Q3, Stock Jumps 10.9%

Adam Hejl /
2021/11/01 8:17 am EDT
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Analog chips maker ON Semiconductor (NASDAQ: ON) announced better-than-expected results in the Q3 FY2021 quarter, with revenue up 32.2% year on year to $1.74 billion. Guidance was also strong with next quarter revenues guided to $1.79 billion, or 4.06% above analyst estimates. ON Semiconductor made a GAAP profit of $310.4 million, improving on its profit of $161.2 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) Q3 FY2021 Highlights:

  • Revenue: $1.74 billion vs analyst estimates of $1.71 billion (1.7% beat)
  • EPS (non-GAAP): $0.87 vs analyst estimates of $0.74 (18.2% beat)
  • Revenue guidance for Q4 2021 is $1.79 billion at the midpoint, above analyst estimates of $1.72 billion
  • Free cash flow of $355.7 million, roughly flat from previous quarter
  • Inventory Days Outstanding: 118, up from 116 previous quarter
  • Gross Margin (GAAP): 41.3%, up from 33.4% same quarter last year

“We delivered another quarter of record results driven by on-going execution of our new strategy with demand remaining strong for our intelligent power and sensing solutions in the automotive and industrial end-markets. We continue to execute our margin expansions plans which drove 310 basis points of non-GAAP gross margin improvement quarter-over-quarter. With a rapidly expanding design-win funnel for disruptive applications such as electric vehicles, ADAS, industrial automation, and alternative energy, coupled with ongoing transformational changes, we are making sustainable progress towards our target financial model,” 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.

Sales Growth

ON Semiconductor's revenue growth over the last three years has been slow, averaging 4.31% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $1.31 billion to $1.74 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 solid quarter for ON Semiconductor as revenues grew 32.2%, topping analyst estimates by 1.7%. This marks 4 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 continue, and is guiding for revenue to grow 18.9% next quarter, and Wall St analysts are estimating growth 9.14% over the next twelve months.

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Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as the cyclical nature of semiconductor supply and demand impacts profitability. In a tight supply environment, inventories tend to be low, allowing chipmakers to exert pricing power, which helps increase gross margins. The inverse also applies, as rising inventory levels tend to foreshadow weakening pricing power and declining gross margins.

ON Semiconductor Inventory Days Outstanding

This quarter, ON Semiconductor’s inventory days came in at 118, 3 days below the five year average, showing that despite the recent increase there is no indication of an excessive inventory buildup at the moment.

Key Takeaways from ON Semiconductor's Q3 Results

Sporting a market capitalization of $20.6 billion, more than $1.38 billion in cash and with positive free cash flow over the last twelve months, we're confident that ON Semiconductor has the resources it needs to pursue a high growth business strategy.

We were impressed by how strongly ON Semiconductor outperformed analysts’ earnings expectations this quarter. And we were also glad to see the improvement in gross margin. On the other hand, there was an increase in inventory levels. Zooming out, we think this was a fantastic quarter that should have shareholders cheering. The company is up 10.9% on the results and currently trades at $53.4 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.