onsemi is Facing a Continued Slowdown in SiC and Greater Competition in CIS from Sony

onsemi reported Q1 2026 revenue of $1.51 billion and non-GAAP EPS of $0.64, while guiding Q2 revenue to $1.40 billion-$1.50 billion and gross margins of 36%-38%. The article argues that two key growth drivers are facing headwinds: a softer EV/SiC market and rising competitive pressure in CMOS image sensors from Sony and TSMC's planned joint venture. Despite these risks, ON shares have already rallied 159.2% over the past year and now trade at 34.41x forward earnings, implying a richer valuation backdrop.

Analysis

The key setup is not a simple demand recovery; it is a normalization trade where ON’s two highest-quality end-market narratives are simultaneously losing scarcity value. In SiC, the market is moving from a supply-constrained pricing regime to a capacity-absorption regime, which usually means margin compression lags revenue by 2-4 quarters as customers renegotiate and qualification expansions outpace unit growth. In image sensing, the strategic risk is that ON is competing against a better-capitalized ecosystem that can now couple sensor design with leading-edge foundry economics, which tends to pull share toward integrated platforms rather than standalone suppliers.

The second-order effect is that ON’s valuation is implicitly pricing in a re-acceleration that requires both EV mix and automotive sensing content to improve at the same time. That is a high bar: even if hybrids partially stabilize automotive unit demand, hybrid architectures generally consume less SiC per vehicle than full BEVs, so the revenue mix may shift away from the most profitable content just as capacity additions come online. This creates a subtle but important bear case: the company can post decent top-line prints while still experiencing weaker incremental gross profit and lower operating leverage.

The market is likely underestimating how quickly the AI-related upside can become crowded. If AI infrastructure demand supports power devices, that demand should also attract broader competition from analog, silicon, and foundry players with larger addressable markets and better pricing power; ON may get a narrative tailwind without proportionate economics. The contrarian view is that the stock’s rerating has already discounted a mid-cycle recovery, so any guidance conservatism or channel buildup could trigger a sharp de-rating over the next 1-3 quarters.

Key Decisions for Investors

• Short ON on strength into the next 1-2 quarterly prints; use a rally toward high-30s/low-40s implied valuation as the entry zone. Risk/reward is favorable because downside can re-rate quickly if SiC pricing or automotive sensor mix disappoints.
• Pair trade: long STM / short ON for the next 3-6 months. STM should benefit more from any remaining SiC scarcity or automotive content resilience, while ON faces the sharper mix and valuation compression risk.
• Avoid chasing WOLF despite sector sympathy; if SiC remains weak, Wolfspeed has the highest balance-sheet and execution fragility. Best expressed as a small-sized short only if borrowing is available, with tighter risk controls than ON.
• Buy downside protection via ON put spreads 1-2 quarters out rather than outright short if borrow is expensive. This captures the risk of a guidance reset while limiting pain if AI-related sentiment temporarily keeps multiple support intact.
• Watch SONY/TSM as a relative-value positive for the sensing supply chain; if the JV gains traction, any pullback in ON should be treated as a sell-the-rip opportunity rather than a deep-value entry.