ON Semiconductor (NASDAQ:ON) Q2: Beats On Revenue, Stock Soars

Anthony Lee /
2023/07/31 8:36 am EDT

Analog chips maker ON Semiconductor (NASDAQ: ON) reported Q2 FY2023 results exceeding Wall Street analysts' expectations, with revenue flat year on year at $2.09 billion. On top of that, next quarter's revenue guidance ($2.15 billion at the midpoint) was surprisingly good and 3.91% above what analysts were expecting. ON Semiconductor made a GAAP profit of $577.1 million, improving from its profit of $456.6 million in the same quarter last year.

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ON Semiconductor (ON) Q2 FY2023 Highlights:

  • Revenue: $2.09 billion vs analyst estimates of $2.02 billion (3.66% beat)
  • EPS (non-GAAP): $1.33 vs analyst estimates of $1.21 (9.82% beat)
  • Revenue guidance for Q3 2023 is $2.15 billion at the midpoint, above analyst estimates of $2.06 billion
  • Free cash flow was -$39.8 million, down from $87.4 million in the previous quarter
  • Inventory Days Outstanding: 162, up from 158 in the previous quarter
  • Gross Margin (GAAP): 47.4%, down from 49.7% in the same quarter last year

“onsemi delivered another excellent quarter, ahead of guidance on revenue and earnings per share, driven by growth in automotive and industrial. Our operational excellence and winning formula have proven to be the right strategy in sustaining our financial performance amid a soft macroeconomic environment,” said Hassane El-Khoury, president and chief executive officer, 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. 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 mediocre, averaging 17.4% annually. But as you can see below, this quarter wasn't particularly strong, with revenue growing from $2.09 billion in the same quarter last year to $2.09 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

While ON Semiconductor beat analysts' revenue estimates, this was a sluggish quarter for the company as its revenue only grew 0.45% year on year. This was its third consecutive quarter of decelerating growth, indicating a potential cycle downturn.

ON Semiconductor's revenue growth has slowed over the last three quarters and its management team projects growth to turn negative next quarter. As such, the company is guiding for a 2.17% year-on-year revenue decline, but Wall Street thinks there will be a recovery next year. Consensus estimates call for 0.91% growth over the next 12 months.

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Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity 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 DIO came in at 162, which is 32 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.

Key Takeaways from ON Semiconductor's Q2 Results

Sporting a market capitalization of $45.4 billion, more than $2.62 billion in cash on hand, and positive free cash flow over the last 12 months, we believe that ON Semiconductor is attractively positioned to invest in growth.

We were impressed by how significantly ON Semiconductor blew past analysts' revenue and earnings per share (EPS) expectations this quarter. We were also glad that next quarter's revenue and EPS guidance came in higher than Wall Street's expectations. On the other hand, its deteriorating gross margin and slight increase in inventory levels wasn't great. Overall, though, we think this was still a really good quarter that should please shareholders. The stock is up 5.56% after reporting and currently trades at $110.87 per share.

So should you invest in ON Semiconductor right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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