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    Insight
    Published
    2025-12-30

    ON Semiconductor (ON): Powering the Electrification Revolution

    ON Semiconductor (ON): Powering the Electrification Revolution

    1. Executive Summary

    ON Semiconductor (ON) is a leading provider of intelligent power and sensing solutions, poised to capitalize on the secular trends of vehicle electrification, advanced driver-assistance systems (ADAS), and industrial automation. The company's focus on silicon carbide (SiC) and gallium nitride (GaN) technologies positions it as a key enabler of higher efficiency and performance in these rapidly growing markets. While recent macroeconomic headwinds have impacted short-term demand, ON's long-term growth prospects remain compelling, driven by increasing content per vehicle and expanding applications in energy infrastructure and industrial sectors. A disciplined capital allocation strategy, including strategic acquisitions and capacity expansion, enhances its competitive position. Despite current market volatility, ON presents an attractive investment opportunity for long-term investors seeking exposure to the transformative trends shaping the future of energy and transportation. The core thesis rests on ON's ability to execute on its SiC ramp, maintain its leading position in power management, and navigate the cyclical nature of the semiconductor industry.

    2. The Business Model

    ON Semiconductor operates through three primary segments: Power Solutions Group (PSG), Advanced Solutions Group (ASG), and Intelligent Sensing Group (ISG). PSG focuses on power management solutions, including power switching, conversion, and signal conditioning, primarily targeting automotive, industrial, and computing end-markets. ASG develops analog, mixed-signal, and logic solutions for various applications, including medical, wireless charging, and wearables. ISG specializes in image sensors and related technologies, serving automotive, industrial, and security markets.

    The company generates revenue by selling semiconductor products to a diverse customer base, including automotive manufacturers, industrial equipment suppliers, and consumer electronics companies. ON utilizes a hybrid manufacturing model, with a combination of in-house fabrication and outsourced manufacturing. This approach provides flexibility and cost efficiency. A key element of their strategy is to increase the mix of high-value, differentiated products.

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    3. Market Opportunity

    The Total Addressable Market (TAM) for ON's products is substantial and growing rapidly, fueled by several key drivers:

    • Vehicle Electrification: The increasing adoption of electric vehicles (EVs) is driving demand for ON's power semiconductors, particularly SiC-based solutions. SiC enables higher efficiency, faster charging, and longer range for EVs.

    • Advanced Driver-Assistance Systems (ADAS): ADAS features, such as lane departure warning, adaptive cruise control, and automatic emergency braking, require advanced sensing and processing capabilities, creating demand for ON's image sensors and related components.

    • Industrial Automation: The growing trend of industrial automation is driving demand for ON's power management and sensing solutions in applications such as robotics, motor control, and process control.

    • Energy Infrastructure: The expansion of renewable energy sources and the need for efficient energy storage are creating opportunities for ON's power semiconductors in solar inverters, battery management systems, and smart grids.

    Estimates suggest the SiC market alone will experience significant growth in the coming years, creating a substantial opportunity for ON. The automotive market, in particular, represents a significant portion of ON's SAM, with increasing content per vehicle as electrification and automation become more prevalent.

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    4. Competitive Moat

    ON Semiconductor possesses several competitive advantages that contribute to its moat:

    • Technology Leadership: ON has established a strong position in power semiconductors, particularly SiC and GaN technologies. Its expertise in these areas allows it to offer differentiated solutions that meet the demanding requirements of automotive and industrial applications.

    • Long-Standing Customer Relationships: ON has cultivated long-term relationships with key customers in the automotive and industrial sectors. These relationships provide a stable revenue base and a competitive advantage in securing new design wins.

    • Scale and Manufacturing Expertise: ON's scale and manufacturing expertise enable it to produce high-quality products at competitive costs. The company's hybrid manufacturing model provides flexibility and resilience in the face of market fluctuations.

    • IP Portfolio: ON owns a significant portfolio of intellectual property related to power semiconductors and sensing technologies. This IP provides a barrier to entry for competitors and protects its market share.

    5. The Quality Scorecard (1-5 Scale)

    • Network Effects: 2 - Limited network effects. Customer stickiness is primarily based on technical performance and reliability.
    • Recurring Revenue: 2 - Primarily transactional sales, although design wins in automotive often lead to long-term revenue streams.
    • Scalability (Gross Margins): 4 - Improving gross margins as the mix shifts towards higher-value SiC products.
    • Financial Strength (Cash vs Debt): 4 - Healthy balance sheet with manageable debt.
    • Innovation: 4 - Strong track record of innovation in power semiconductors and sensing technologies.

    6. Valuation & Scenarios

    • Current Valuation: Based on current market data (as of December 30, 2025), ON's PE ratio is not meaningful due to the effects of an extraordinary write-down impacting trailing twelve month earnings. The PEG ratio is also not meaningful. The company's intrinsic value rests on projections for future growth in its key markets.
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    • Bull Case (Price Target): In a bull case scenario, ON successfully executes its SiC ramp, captures significant market share in the EV power semiconductor market, and benefits from strong growth in industrial automation. Assuming revenue growth accelerates to 15% annually over the next 5 years and the company achieves a PE multiple of 25x, a price target of $120 is justifiable. This scenario assumes successful navigation of supply chain constraints and sustained high demand for EVs and industrial automation solutions.

    • Bear Case (Downside Risk): In a bear case scenario, ON faces challenges in its SiC ramp, loses market share to competitors, and experiences a significant slowdown in the automotive and industrial markets. Supply chain disruptions, increased competition, and a broader economic recession could negatively impact ON's performance. Assuming revenue declines by 5% annually over the next 3 years and the company trades at a PE multiple of 15x, a downside risk to $50 is possible.

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    7. Key Risks

    Several risks could impact ON Semiconductor's performance:

    • Cyclicality: The semiconductor industry is inherently cyclical, and ON's revenue and profitability are subject to fluctuations in demand.
    • Competition: The power semiconductor market is competitive, with established players and emerging entrants vying for market share.
    • Technology Obsolescence: Rapid technological advancements could render ON's products obsolete if the company fails to innovate and adapt.
    • Supply Chain Disruptions: Disruptions in the global supply chain could impact ON's ability to manufacture and deliver its products.
    • Customer Concentration: ON relies on a relatively small number of key customers for a significant portion of its revenue. Loss of one or more of these customers could negatively impact its financial performance.
    • SiC Ramp Execution: Successfully scaling SiC production to meet growing demand is critical to ON's growth strategy. Failure to execute effectively on this ramp could limit its ability to capitalize on the EV opportunity.

    8. Conclusion

    ON Semiconductor presents a compelling investment opportunity for long-term investors seeking exposure to the secular trends of vehicle electrification, ADAS, and industrial automation. The company's technology leadership, long-standing customer relationships, and disciplined capital allocation strategy position it for sustained growth. While short-term macroeconomic headwinds and execution risks remain, the long-term growth prospects for ON appear attractive. A neutral rating is maintained, acknowledging the potential upside while recognizing the inherent risks in the semiconductor industry. Further monitoring of the SiC ramp and competitive landscape is warranted before considering a more bullish stance. We will revisit this investment idea in Q2 2026.