Onsemi well positioned for rising data center power demand, Jefferies says

Jefferies said Onsemi is positioned to benefit from rising data-center power demand and argued that investor concerns over post-analyst-day margins are overstated. The broker views Onsemi's 53% gross-margin target as a milestone rather than a ceiling, citing potential upside from higher volumes, lower costs, and the ramp of differentiated data-center products.

Analysis

The investable question is whether ON can convert data-center power content into a mix shift large enough to offset its more cyclical industrial and automotive exposure. If the company’s differentiated power modules/controllers gain qualification with hyperscaler and server-OEM platforms, incremental revenue should carry materially higher contribution margins than its legacy portfolio, creating upside to both utilization and gross margin. The key second-order beneficiary is not simply AI capex: higher rack power density increases the value of efficiency, thermal-management, and high-voltage conversion components, where qualification cycles create stickier pricing than commodity semis.

Near term, this is unlikely to be a clean earnings catalyst absent evidence that design wins are moving from sampling to production orders. Over the next 1-3 months, channel inventory, auto/industrial demand recovery, and commentary on factory loading will matter more to the stock than long-dated data-center TAM. Over 6-18 months, ON’s multiple can expand if data-center revenue becomes sufficiently material to reduce the market’s perception of it as an auto-cycle proxy; failure to demonstrate revenue mix and utilization improvement would instead leave the company exposed to margin skepticism and multiple compression.

Consensus may be too focused on the stated margin milestone, but also too willing to capitalize an AI-adjacent narrative before disclosed revenue contribution. The differentiator versus broad analog peers is not announced opportunity but verified content per rack, customer qualification, and the gross-margin profile of those shipments. This is a selective accumulation setup rather than a chase on broker commentary.

Key Decisions for Investors

• Accumulate ON on weakness over a 1-3 month horizon only if management confirms sequential improvement in utilization or data-center design-win conversion at the next earnings update; target a rerating toward analog/power peers if gross-margin trajectory turns upward. Falsifier: another material guide-down in industrial/auto revenue or gross-margin guidance below the company’s prior recovery path.
• Use a pair trade: long ON / short MCHP or TXN in equal beta-adjusted dollars for 6-12 months, expressing a view that ON’s data-center power mix and operating leverage can outperform more mature broad-based analog exposure. Exit if ON does not disclose tangible data-center revenue/customer traction by two reporting cycles.
• Do not buy upside calls solely on the margin target. Establish an alert around the next earnings release for data-center revenue disclosure, backlog conversion, and utilization commentary; absent those data, the catalyst is narrative-driven and option premium is unlikely to offer favorable asymmetry.
• Monitor peers and supply-chain indicators—Vertiv (VRT), Eaton (ETN), and server power-management commentary—for confirmation that rack-power intensity is translating into component demand. A deceleration in their data-center order growth would weaken the presumed demand pull-through before it appears in ON results.