ON Semiconductor Plunges 35% YTD: Buy, Sell or Hold the Stock?

ON Semiconductor (ON) shares have underperformed, falling 34.5% year-to-date due to weak growth across its PSG, AMG, and ISG segments, with revenues down significantly in the first quarter of 2025, particularly in the automotive and industrial sectors; however, AI data center revenues more than doubled, driven by silicon carbide solutions, and the company anticipates UPS revenue growth of 40-50% by 2025, though pricing pressures and low manufacturing utilization are negatively impacting gross margins, leading to weak Q2 guidance.

Analysis

ON Semiconductor's shares have significantly underperformed, declining 34.5% year-to-date, far exceeding the industry's 5.9% and sector's 3.7% downturns. This underperformance stems from broad-based weakness in Q1 2025, with Power Solutions Group revenues (44.6% of total) falling 26.2% year-over-year, Analog and Mixed Signals Group revenues (39.2% of total) declining 18.7%, and Intelligent Sensing Group revenues (16.2% of total) dropping 19.7%. The crucial automotive segment (52.7% of revenues) saw a 25.1% YoY revenue decrease, while the industrial end-market (27.7% of revenues) fell 16%, attributed to weak demand, geopolitical tensions, and a slowdown in EV adoption. Conversely, AI data center revenues more than doubled YoY in Q1, driven by silicon carbide (SiC) and silicon-powered devices, with the company anticipating 40-50% growth in UPS revenues by 2025 from its EliteSiC solutions. Despite this bright spot, ON faces stiff competition from peers like Magnachip, NXP, and Analog Devices, which have seen smaller YTD declines. Operational challenges include pricing pressure, with low single-digit price cuts expected, and low manufacturing utilization, which stood at 60% in Q1 2025 and is projected to decline further, leading to a 590 basis point YoY drop in gross margin to 40% and an expected 900 bps of non-cash underabsorption charges in Q2. Consequently, Q2 2025 guidance is weak, with revenues projected at $1.40-$1.50 billion (a 16.48% YoY decline at midpoint) and non-GAAP EPS at $0.48-$0.58 (a 43.75% YoY decline at midpoint). However, ON's SiC portfolio shows promise, strengthened by the acquisition of Qorvo's SiC JFET assets and a major design win with a U.S. OEM for a PHEV platform. The company targets a 35-40% SiC market share and notes a revival in the China market, where 50% of new EV models are expected to incorporate its SiC technology.

Key Decisions for Investors

• Investors should exercise caution given the significant revenue declines across major segments, persistent pricing pressures, and manufacturing underutilization impacting gross margins, as reflected in the weak Q2 2025 guidance.
• Monitor the traction of ON Semiconductor's SiC initiatives, particularly market share gains in the EV sector (especially in China), growth in AI data center revenues, and progress towards the 40-50% UPS revenue growth target by 2025, as these are critical for potential long-term recovery.
• Closely watch for stabilization in the automotive and industrial end-markets, as improvements here are necessary to alleviate the current broad-based demand weakness impacting the company.
• Evaluate the competitive positioning against peers like ADI and NXPI, especially in automotive and industrial sectors, and assess ON's ability to mitigate margin erosion from operational inefficiencies and pricing cuts.